By Sneha S K
May 13 (Reuters) - U.S. health insurers' strong first-quarter results signaled more stable medical costs after prolonged pressure, but Wall Street analysts want to see another similar quarter before they are convinced.
Rising medical costs across government-sponsored health plans have weighed on the industry over the past three years, pushing the S&P managed care index down more than 12% since July 2023.
But in recent weeks, major health insurers, including UnitedHealth Group, Cigna, Humana,
Elevance Health and Centene, reported first-quarter results above analysts' expectations and said they have a better grip on managing higher costs.
It was their best showing since the COVID-19 pandemic, when insurers reaped the benefits of low medical services use, Oppenheimer analyst Michael Wiederhorn said in a note on Tuesday.
Insurers typically report stronger first-quarter earnings as many members have yet to meet their deductibles, resulting in fewer claims payouts.
"It is probably a little early to call a victory," said Morningstar analyst Julie Utterback, noting that lower costs in the quarter may be related to a weak respiratory season this past winter. But, she said, the stock price performance certainly was the best seen in a while.
EYES ON UPCOMING QUARTER
Insurers have been strained by elevated demand, driven in part by a surge in healthcare utilization under Medicare plans for older adults or individuals with disabilities, and by changes in enrollment rules for Medicaid plans for lower-income Americans that have saddled them with sicker, more costly members.
"Cost trends appear to be stabilizing. It is early in the year, but we believe the outlook for most health insurers is conservative and the possibility exists that we will see further positive earnings estimate revisions," said UBS analyst AJ Rice in an emailed response.
Even so, the next months remain uncertain.
"Second quarter is usually the quarter that is the test," Leerink Partners analyst Whit Mayo told Reuters. Historically, that could be the quarter that can really surprise the health insurers, as claims run out in May, said Mayo.
UnitedHealth Chief Financial Officer Wayne DeVeydt during the BofA healthcare conference on Tuesday said, "It's important to see how April and May evolves. We'll get a lot of the claims from Q1 actually paid in that window and understand with a little more clarity."
If the trends in the first quarter were to continue, this will be a very strong year, he said.
Analysts also pointed out some one-off factors such as a weaker flu season and weather disruption that delayed care as adding to lower costs during the quarter.
"Investors are concerned that core/fundamental strength is being mistaken for flu/weather. We do not share this concern," Cantor Fitzgerald analyst Sarah James said in a note.
Temporary factors largely impacted lower acuity services like eye care and GI procedures, that left insurers handling more serious cases, James said.
Oppenheimer analyst Wiederhorn echoed the view. While the industry benefited from some one-time tailwinds, medical cost trend "may finally be improving, as the unsustainable levels reached over the last two years might finally be decelerating."
According to Cantor's James, the "outperformance on the remaining cases support that there is core/fundamental strength rather than an artificially strong quarter."
(Reporting by Sneha S K, writing by Sriparna Roy in Bengaluru; Editing by Shilpi Majumdar)
