### Major US Health Insurers Shock Investors With Unanticipated Earnings Forecasts

In a startling turn of events this week, two of the largest health insurers in the US have significantly lowered their earnings forecasts, causing a dramatic decline in their stock prices and erasing $55 billion from their combined market value. This chain of events has left investors and analysts deeply concerned about potential future surprises in the industry.

On Thursday, Elevance Health Inc. announced that its adjusted earnings per share will remain flat for the year and will grow more slowly than projected for 2025. This statement came after UnitedHealth Group Inc. had already issued its own disappointing forecast on Tuesday, predicting weaker performance through the end of the next year. These announcements resulted in profound intraday stock drops—the largest since March 2020 for both companies—with Elevance shares plummeting by 20% and UnitedHealth shares falling by 8.1%.

The health insurance sector has enjoyed robust growth over recent years, especially from Medicare and Medicaid, which together cover more than one-third of the American population. However, rising costs in Medicaid and tightened Medicare payments from Washington have begun to exert pressure on these financial stalwarts.

Elevance attributed its financial shortfall largely to unexpectedly high costs in its Medicaid business. This sector has been under strain as states have removed 14 million people from Medicaid coverage since early 2023, reversing expansions made during the Covid-19 emergency. Elevance's senior management acknowledged "unprecedented challenges" but provided limited explanation for the soaring costs, a point of contention raised by analyst Spencer Perlman from Veda Partners.

A unique challenge for Medicaid insurers is that they operate under multi-year contracts with states, making it difficult to adjust prices annually as they do in other business lines. Adjusting for rising costs can involve lengthy negotiations with states, which often rely on outdated data. Elevance's Chief Executive Officer, Gail Boudreaux, noted the need for time to adapt but characterized the issue as industry-wide and "time-bound."

The Medicaid upheaval was anticipated to impact insurers, as healthier individuals were more likely to lose coverage, retaining those with greater healthcare needs. It remains uncertain if Medicaid-centric companies like Centene Corp. and Molina Healthcare Inc. will experience similar challenges, with their results expected next week. Whether Elevance's problems stem from broader policy issues or specific execution failures is still under debate.

Meanwhile, UnitedHealth has been hit by tighter Medicare regulations. Accused for years of inflating payments through Medicare Advantage plans by overstating member illnesses, insurers are now seeing new payment rules aimed at curbing these practices. UnitedHealth CEO Andrew Witty described this policy shift as a "price cut" from the government.

As the industry braces for the 2024 US presidential election, the outcome could significantly affect health insurers' fortunes. A potential victory for Republican candidate Donald Trump might lead to more favorable rates for private Medicare plans, benefiting companies like UnitedHealth, Humana, and CVS Health Corp. Conversely, a win for Vice President Kamala Harris could favor insurers specializing in Medicaid and Affordable Care Act plans, such as Elevance, Centene, and Molina.