Q3 2024 Earnings Preview: Big Six Payors

IRA, FTC, Biosimilars and the fall of Medicare Advantage

As we approach Q3 earnings season, the “Big Six Payors” have faced a turbulent year marked by increased utilization, regulatory changes from IRA, and key strategic pivots. Each of the top six health insurers—Cigna, CVS, Humana, Centene, Elevance, and UnitedHealth Group—have their unique challenges, but overall, they’ve managed to weather the storm with varied success. Here's what to expect in the upcoming Q3 calls based on their Q2 performance.

Cigna: A Focus on Evernorth and Specialty Pharmacy (Earnings call 10/31)

Full disclosure, I am in love with what Cigna has done over the past 18 months as they have been able to avoid the headwinds of the government lines of business. Cigna has continued to lean heavily on its Evernorth division, which drove $49 billion of its $60.5 billion in Q2 revenue. The specialty pharmacy and biosimilars markets have become key growth drivers for the company, as seen in the 30% growth Evernorth reported. The addition of Centene’s contract and innovations like EnCircleRx in the GLP-1 space also provide optimism going into Q3.

However, regulatory pressures on Pharmacy Benefit Managers (PBMs) remain a potential challenge as we head into an election year with a potential shift at the head of the FTC. Expect a focus on how biosimilars and new specialty drug partnerships can continue to drive margin expansion. Evernorth and ESI are innovating better than anyone right now and they are building solutions around their core customer (the employer market). 

Q3 Outlook:

Cigna's continued success in specialty medications and the growth of Evernorth will likely carry the company and expect them to come up with some creative ideas on driving down costs of GLP-1 (beyond EncircleRX) and do some interesting things in the oncology space with Accredo and CuraScript. Watch for updates on Cigna’s progress in the biosimilar space and their ability to keep specialty pharmacy margins strong. Stock is up 12% year to date but I love that they are getting close to their customer and moving with them.

CVS: Struggling to Define Its Identity (Earnings call 11/6)

CVS had a rough Q2, marked by guidance downgrades, higher utilization costs, and a weaker-than-expected performance in the Aetna business. The company is undergoing significant structural shifts as Karen Lynch takes a more direct role in Aetna’s operations firing the CEO of Aetna last month. However, specialty pharmacy under Cordavis is showing potential, especially with its focus on biosimilars and partnerships. They are looking to the biosimilar market with Humira and Stelara next year as a potential mechanism to drive revenue.

The closure of 900 retail locations and the divestment of non-core assets highlight CVS’s challenge in redefining itself. Caremark’s loss of the Centene contract has also been a drag on revenue in the largest domestic PBM space driving top line down year over year. 

Q3 Outlook:

Expect CVS to continue focusing on cost containment and specialty pharmacy expansion through Cordavis. Medicaid redeterminations and utilization pressures in the Medicare Advantage space will still be in play, but the success of their biosimilar programs could provide a much-needed tailwind in the back half of the year. Glenview Capital meeting with the executive team last week is not a great sign for Karen Lynch as she struggles to integrate Oak Street and Signify which are two assets she acquired to drive efficiency in the MAPD market. Last open enrollment, Aetna leaned in and won 800,000 new lives in MAPD but it has been more of an anchor than a tailwind which has put Karen in a tough spot.

Humana: Medicare Advantage and Long-Term Investment (Earnings call 10/30)

I do not think anyone has had a worse 2024 than Humana as last week the hits kept on coming as they reported that the number of members in a 4-Star or better plan fell to 25% from 94% as they saw their largest MAPD plan fall from 4.5 to 3.5. The stock is down 48% year to date and they are in desperate need of good news. Humana’s Q2 earnings were a mixed bag, with 10.5% revenue growth offset by higher-than-expected Medicare Advantage costs. Member growth remains strong, but inpatient costs have risen, putting pressure on margins. Humana is focusing on long-term investments, such as the Walmart partnership and expanding CenterWell clinics.

However, Medicare Advantage challenges remain a major theme. Humana’s 2025 bids reflect a cautious approach to managing risk in the face of CMS funding cuts and V-28 risk adjustment changes.

Q3 Outlook:

Watch for continued pressure on Medicare margins, but CenterWell’s integration and Humana’s push into value-based care could stabilize growth. The Part D business will also be a key area to monitor, particularly as the Inflation Reduction Act’s cap on out-of-pocket costs approaches. I am really interested to hear some of the plans around shrinking the overall Medicare business as they leave markets along with some of their strategies to try to make MAPD great again. Jim Rectin has his work cut out for him as he is now 3 months into the CEO role.

Centene: ACA Growth Amid Medicaid Challenges (Earnings call 10/25)

Centene had a stellar Q2, with 15% EPS growth and a rally in its stock price. The ACA Marketplace continues to be the company’s star performer, with 34% membership growth. While Medicaid redeterminations have led to the loss of 3 million members, Centene is betting on state procurements to stabilize this segment in the coming quarters. Sarah London has done a wonderful job over the past 2 years of making the company a good steward of capital and has them in a good spot for 2025

The Medicare line remains a sore spot, with poor STAR ratings and the possibility of selling off the Wellcare business in the future. STAR ratings has been a huge initiative and I am anxious to see if they drive impact as this has been a multi-year promise to improve. Meanwhile, Centene’s divestment of non-core assets has allowed it to focus more on core areas like the ACA and Medicaid.

Q3 Outlook: