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(Bloomberg) -- Cigna Group shares slumped after the health insurer reported cost pressures from surprisingly high catastrophic medical claims that are likely to persist.
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Cigna’s health benefits division spent 87.9% of premium revenue on medical expenses in the fourth quarter, more than analysts were expecting from that key measure. Management blamed it on “stop loss” plans, which employers use to guard against costly medical claims.
Cigna’s management said the problem was increased use of cancer drugs like Keytruda, which is priced at around $200,000 a year, and multiple sclerosis treatment Ocrevus, listed at around $80,000 annually. Expensive hospital stays for cancer and heart surgeries also drove up medical spending, management said.
Worryingly for investors, Chief Financial Officer Brian Evanko said management discovered the magnitude of costs in these catastrophic plans too late in the year to sell most plans at higher prices for the current year. Cigna said this problem will weigh on margins for the next two years and offered full-year guidance that was lower than what they projected in October.
Cigna’s shares fell as much as 11% Thursday morning, their biggest intraday loss since August 2021. The drop wiped out Cigna’s gain of 9.8% this year through Wednesday’s close.
Investors have been worried about out-of-control medical costs across the industry. UnitedHealth also reported surprise jumps earlier this month but the company’s management said its 2025 pricing should fix the issue.
Cigna forecast medical costs higher than analysts were expecting. The company forecast spending 83.2% to 84.2% of 2025 premium revenue on medical costs, compared with the average estimate of 81.8%. Investors prefer a lower number.
Mizuho’s Jared Holz said the forecast looks “more conservative than not but need to see how this shakes out.”
Adjusted income from operations was $6.64 a share in the three months ended Dec. 31, lower than the average estimate. Profit in 2025 will be at least $29.50 a share, Cigna said. That’s also below the average analyst estimate of $31.50 compiled by Bloomberg.
The insurer also operates a top pharmacy benefits manager, which negotiates drug prices between manufacturers, insurers, and pharmacies. The drug middlemen have been under fire from some Washington lawmakers and regulators who say that PBMs elevate drug costs.