UnitedHealth is bracing for a struggle next year with the financial effects of shifting Medicare Advantage payment rates.

The health insurance giant released 2024 guidance on Tuesday that included a number of less favorable metrics than analysts expected.

During the company’s investor day in New York City on Wednesday, UnitedHealth executives blamed the outlook on an MA rate change issued by regulators earlier this year that insurers slam as a payment cut.

Pressured metrics include slower MA membership growth, lower margins at UnitedHealthcare and a higher medical loss ratio. UnitedHealth forecast a 2024 MLR of 84%, a full percentage point higher than analysts’ consensus expectation.

Despite the MA headwind, UnitedHealthcare’s financial targets overall still came in in-line or ahead of analyst expectations.

MA rates ‘ripple’ through UnitedHealth’s 2024

UnitedHealth is a behemoth in the U.S. healthcare industry, with one of the largest pharmacy benefits managers, an expanding healthcare IT arm and a growing presence in care delivery, including a network of tens of thousands of physicians.

UnitedHealth is also the dominant health insurer in many markets, including in MA. The Minnesota-based company is the largest provider of the privately-run Medicare plans.

Management has said they expect their share of the market to grow as more seniors age into the government insurance program and select MA over traditional Medicare.

However, UnitedHealth is now saying that MA growth could be depressed next year thanks to a rate notice from the CMS that’s deeply unpopular with insurers.

Earlier this year, the CMS finalized MA rates for 2024 that regulators said should result in a 3.3% increase in revenue for health insurers in the program. The changes also include a new approach to risk adjustment meant to curb upcoding, a practice where insurers inflate their members’ sicknesses to get higher payments from the government.

However, insurers have said the changes, which are being phased in over the next three years, will result in a net decrease to MA revenue overall.

“That rate notice has a material impact in terms of revenues associated with our Medicare Advantage portfolio, and as you can see that ripples through the metrics of the organization,” CEO Andrew Witty said during UnitedHealth’s investor day.

UnitedHealthcare, UnitedHealth’s health insurance division, now expects slower Medicare revenue and membership growth next year than analysts expected.

UnitedHealth expects to add between 325,000 and 375,000 Medicare Advantage members next year, representing almost 4% growth at the midpoint — “well below our model,” commented JP Morgan analyst Lisa Gill in a note.

That’s compared to 11% membership growth year to date in 2023, according to CMS data cited in a TD Cowen note. Previously, UnitedHealth leadership said they expected to grow above the overall MA industry growth rate in 2024, so “this appears to be a disappointment,” TD Cowen analyst Gary Taylor wrote.

However, “we are not materially surprised to see the slower growth rate in 2024 given the changes with the risk adjustment,” Gill said.

Some payers have said the rate changes could force them to cut benefits in MA. Yet, UnitedHealth has spent the last six months reconfiguring its plans in response to the rate notice, looking for ways to contain costs without curtailing benefits, Witty said.

UnitedHealthcare should bring in about $303 billion in revenue next year, mostly driven by Medicaid upside, the company said. TD Cowen’s Taylor noted he was unsure why UnitedHealth forecast the Medicaid improvement, given Medicaid payers are shedding members as states recheck eligibility for the safety-net insurance coming out of the COVID-19 pandemic.

UnitedHealth thinks its Medicaid enrollment will drop by up to 200,000 members next year due to redeterminations, the company said.

Eye on Optum Health

UnitedHealth leadership devoted half of their investor day to talking about the insurer’s plans to expand value-based care arrangements — a “core objective” for the next several years, Witty said.

A key actor in striving for that objective is Optum Health, UnitedHealth’s care delivery network that’s under the umbrella of its health services business Optum.

Optum released stronger 2024 guidance than analysts expected. Much of that growth is due to better-than-expected margins for Optum Health, analysts said.

Optum Health has been working to transition commercial lives into more lucrative value-based arrangements, management said in comments earlier this year.

Currently, Optum Health has about 4 million lives in fully accountable payment arrangements — a number that’s nearly doubled from 2021, said UnitedHealthcare CEO Brian Thompson during the investor day.

Optum Health expects to add another 750,000 lives by the end of next year.

”You should expect us to grow that number substantially each year,” Thompson said. “Our long-term ambition is to transition as many people as possible into value-based care.”

Overall, UnitedHealth expects 2024 adjusted profit of $27.50 to $28 a share, largely in line with what analysts expected.

Expected revenue is $400 billion to $403 billion, higher than Wall Street consensus.