A top official in the U.S. health insurance industry has raised the alarm on a potential surge in costs a problem that reaches every corner of the country’s already complex healthcare system. UnitedHealth Group, one of the biggest players in the industry, sent its shares plummeting after reducing its quarterly profit outlook, blaming higher-than-anticipated medical costs in its privately operated Medicare plans.
The news was picked up quickly by Wall Street. Analysts tend to think of UnitedHealth as a bellwether for the entire insurance sector, particularly because it is the country’s biggest player in the Medicare Advantage space. If UnitedHealth is struggling here, many think its rivals may not be far behind.
Health insurers’ bad luck beginning 2024 with lower government payments and higher medical expenses is apparently persisting. TD Cowen analyst Ryan Langston characterized “ominous signs” of rising costs in Medicare Advantage, pointing out that UnitedHealth had previously indicated such in 2023. Langston implied that the trends might place pressure on the full-year estimates for other insurers. The ripple effect was evident when firms such as Humana and Elevance Health watched their stocks fall following UnitedHealth’s announcement.
1. Why Medical Costs Are Rising
Healthcare prices have been increasing across the board over the last year. One reason is that increasing numbers of seniors are now getting elective procedures like joint and hip replacements, procedures many put off during the pandemic. With these procedures and other medical care on the rise, so are insurer costs.
UnitedHealth reported that Medicare usage growth within its Advantage plans has significantly exceeded projections. First quarter trends indicate medical activity is increasing at a rate of about double what the company projected for 2024.
Andrew Witty, CEO of UnitedHealth, pointed out that a lot of this growth is occurring in physician and outpatient care, which do not involve overnight hospital stays. Lance Wilkes, a Bernstein senior equity analyst, characterized the increase in utilization as “very unusual” and “really surprising” considering how busy the healthcare industry was already last year.
2. Possible Changes in How Insurers Deliver Care
Wilkes surmised that UnitedHealth, and possibly others, might be relaxing some cost-containment policies, including requirements for prior authorization. While this would allow patients more rapid access to care, it might also increase costs.
He attributed this change to mounting “policy headwinds” and more intense regulatory scrutiny. UnitedHealth is under investigation for its billing practices and managing the aftermath of the recent on-the-job death of an executive. Wilkes opined that the Department of Justice’s continued interest in the company might be shaping its strategy for managing patient care.
3. Issues in UnitedHealth’s Other Segments
Aside from Medicare Advantage, UnitedHealth has also seen problems in its Optum healthcare sector, specifically in its pharmacy benefit management segment. These are attributed to shifting patient profiles and health needs.
CEO Andrew Witty admitted to these challenges but was optimistic that they could be solved by 2026. He added that the company is already working to solve the issues and transition to changing patient profiles.
4. Policy Changes and the Medicare Advantage Outlook
Even in the face of present headwinds, there could be some cause for relief in the future for the Medicare Advantage market. In April, the Trump administration disclosed its intention to largely raise reimbursement levels for these insurers, countering previous proposals made by the Biden administration.
Although this shift may reduce financial pressure on private Medicare providers, escalating costs are not unique to Medicare Advantage. Government marketplace plans and Medicaid are also under stress. Sometime later this year, the expanded Medicaid benefits enacted during the pandemic will expire an occurrence that analysts predict will significantly increase costs for many Americans.
5. The Role of ACA Subsidies in Keeping Coverage Affordable
The increased subsidies that have made millions able to pay for healthcare plans under the Affordable Care Act (ACA) are another central component of this picture.
Background: Initially passed in 2021 as part of the Rescue America legislation of the Biden administration, these subsidies have rendered ACA marketplace plans more accessible than ever before. Since the start of their availability, enrollment has risen each subsequent year, with more than 21 million in 2024. Southern states experienced considerable growth.
How They Work: The subsidies are tax credits to reduce monthly premiums. Qualification is based on income, that is, 100% to 400% of the federal poverty level. Subsidies can make premiums nearly zero for low-income people.
Who is Eligible: These credits aim to assist families that are not eligible for Medicaid. For qualifying households, premiums are limited to 8.5% of income a number indexed for family size.
6. The Impending Subsidy Expiration and How It Affects
Today, these increased subsidies are set to expire on December 31, 2025. Because the GOP-led spending bill being negotiated does not extend them, numerous individuals anticipate a sharp spike in premiums.
If the subsidies expire, premiums would increase by as much as 70% for some families. The Congressional Budget Office estimates that ACA marketplace enrollment would decline from more than 21 million to only 15.4 million by the year 2030. That means millions would lose coverage.
7. The State and Employer Perspective
It’s not just individuals and families feeling the squeeze. State governments and employers are also grappling with higher insurance costs.
In Idaho, premiums for over 100,000 state workers increased 8% in this year. Nationally, employer plans are facing the same increases due to a combination of increased use, costly new medications, and residual supply chain issues in the healthcare industry.
8. The Bigger Picture: Why Costs Keep Climbing
A number of related influences are driving healthcare costs higher:
- Increased Medical Utilization: Particularly outpatient and physician services.
- Policy and Regulatory Changes: Reimbursement rate changes, government regulation, and insurer behavior.
- Expiration of Pandemic-Related Programs: The phaseout of expanded Medicaid benefits and ACA subsidies would eliminate important affordability supports.
- Employer Pressures: Increasing costs for state and private employer-sponsored health plans.
- New Drugs and Treatments: New therapies are effective but exorbitantly priced.
These elements all come together to create a difficult landscape for insurers, employers, and consumers alike.
9. What to Expect Looking Ahead
In the years to come, a number of trends will define the healthcare cost landscape:
- Policy Actions on Subsidies: Whether Congress moves to renew ACA subsidies will decide the affordability of marketplace plans.
- Medicare Advantage Utilization Trends: If the trend of increased outpatient and physician services persists, insurers might be required to change pricing, as well as plan designs.
- Regulatory Decisions: Continued probing of billing practices and cost control may impact the way insurers do business.
- Employer Tactics: Companies can search for other means to control costs, including wellness programs or other insurance models.
Last Thoughts
UnitedHealth’s profit warning is not only a tale of one firm’s financial prospects it’s a picture of a much larger challenge. Increasing utilization, policy uncertainty, and expiring affordability measures are coming together to drive nasty cost pressures.
For citizens, that means keeping a close eye on policy developments and thinking through what implications changes in subsidies or coverage provisions may have for individual pocketbooks. For policy makers, it highlights the importance of weighing budgetary considerations against the practical effect on Americans’ access to care.
The next few months will be decisive. If cost pressures are not curbed, the U.S. may experience a sudden jump in the number of uninsured, with long-term implications for public health and financial stability. UnitedHealth’s alarm call may turn out to be an early warning of a storm that will reach every stakeholder in the healthcare system from Wall Street to Main Street.
