U.S. health insurers reported a solid start to the year, with first-quarter results that point to cooling medical-cost pressure after an extended period of elevated expenses. Still, Wall Street analysts said they are looking for a repeat performance in the coming quarter before calling the trend established.
The industry has been under strain from rising medical costs across government-sponsored plans over the past three years, a dynamic that contributed to a more than 12% decline in the S&P managed care index since July 2023. In recent weeks, several large insurers - including UnitedHealth Group, Cigna, Humana, Elevance Health and Centene - posted first-quarter earnings above analysts' expectations and reported improved control over higher costs.
Oppenheimer analyst Michael Wiederhorn noted in a research note on Tuesday that the sector's results were its best showing since the COVID-19 pandemic period, when insurers benefited from reduced use of medical services. The first quarter often produces stronger earnings for the industry because many members have not yet met their deductibles, which typically lowers claims paid in that period.
Despite the upbeat reporting season, some analysts urged caution. Morningstar analyst Julie Utterback said it is probably premature to declare a durable victory on cost trends, noting that part of the lower costs in the quarter may reflect a weaker respiratory season this past winter. She added, however, that the recent stock price behavior in the sector was the strongest seen in some time.
Analysts highlight the second quarter as the key test
Market observers emphasized that the coming months are critical. Elevated demand has strained insurers, driven in part by increased healthcare utilization under Medicare for older adults and people with disabilities, and by enrollment rule changes for Medicaid that have left plans with sicker and costlier members.
UBS analyst AJ Rice said in an emailed response that cost trends appear to be stabilizing and that, while it is early in the year, the outlook for most health insurers is conservative - opening the possibility of positive earnings estimate revisions. Still, the next period is uncertain.
Leerink Partners analyst Whit Mayo told Reuters that the second quarter is usually the real test for insurers because claims from the first quarter are often paid in the April-May window, which can reveal the full extent of incurred but not yet reported activity. UnitedHealth Chief Financial Officer Wayne DeVeydt made a similar point at the BofA healthcare conference, saying it is important to see how April and May evolve, since many Q1 claims will be settled then and provide more clarity. He added that if Q1 trends persist, the company would expect a very strong year.
One-off factors and acuity mix under scrutiny
Analysts and executives also pointed to temporary influences on the quarter's costs. A milder flu season and weather-related delays in care were cited as contributors to lower utilization in some areas. Cantor Fitzgerald analyst Sarah James cautioned that investors worry core strength could be mistaken for impacts from flu and weather, but she said she does not share that concern.
James highlighted that the temporary factors largely affected lower-acuity services - examples cited include eye care and gastrointestinal procedures - while insurers continued to manage more serious cases. Oppenheimer's Wiederhorn similarly said that although the industry benefited from certain one-time tailwinds, the medical-cost trend may finally be improving after reaching unsustainable levels over the past two years.
James also argued that the outperformance seen among the remaining, more serious cases supports the view that the industry is displaying fundamental strength rather than an artificially strong quarter driven solely by transient factors.
What investors and market participants will watch next
With Q1 results providing a cautiously optimistic signal, the second quarter's claims payment patterns, the evolution of respiratory-season dynamics, and the persistence of enrollment-driven acuity changes in Medicare and Medicaid remain central to assessing whether the improvement is durable. Analysts will be watching whether medical-cost trends continue to decelerate and whether earnings estimate revisions follow.
For now, the industry appears to have narrowed the gap in controlling elevated costs, but a clear and sustained downshift in medical-cost inflation will need to be demonstrated in subsequent reporting periods before analysts broadly revise longer-term assessments.