3 Implications for Big Insurers From UnitedHealth's Q3 Results

Wall Street clearly isn't happy with UnitedHealth Group (NYSE: UNH  ) . Shares fell more than 5% after the company reported its third-quarter results. Were the numbers that bad? Not really.

Revenue jumped 12% year-over-year to $30.6 billion. Earnings were up a smidgeon -- from $1.56 billion, or $1.50 per share, a year ago to $1.57 billion, or $1.53 per share, in the last quarter. But UnitedHealth usually beats expectations. It didn't do so this time around. Furthermore, the company narrowed its full-year guidance but kept the top end of the range intact.

UnitedHealth is the first major insurer to announce earnings. What does the company's ho-hum numbers possibly mean for the rest of the industry? Here are three factors from UnitedHealth's third-quarter results that could make a big difference for other insurers, too.

1. Medicare cuts take their toll
Earnings for UnitedHealthcare, the company's health insurance business segment, dropped $199 million compared to the same period in 2012. Cuts to the Medicare Advantage program were cited as a key reason behind this decline.

Other big insurers will probably also take a hit from these cuts. WellPoint (NYSE: ANTM  ) counted nearly 1.5 million Medicare members last quarter. That's not nearly as large as UnitedHealth's 2.97 million Medicare Advantage customers and 3.4 million Medicare Supplement customers, but it's still a sizable number.

Humana (NYSE: HUM  ) could really feel a sting from the cuts. Medicare products made up nearly three-quarters of the company's total premiums and services revenue in the first half of 2013.

Aetna (NYSE: AET  ) wouldn't feel the brunt of the cuts as much as Humana. The large insurer received around 25% of total revenue from Medicare-related programs in the first half of the year. That's still a significant part of the company's business, though.

2. OK becomes not OK without ancillary businesses
Increasing earnings by only 1% year over year isn't great, but at least the bottom line is improving. But if you dig into UnitedHealth's results, you'll find that the only reason that earnings growth occurred was because of the company's Optum business segment.

Optum -- which provides pharmacy benefit management, health care consulting, and technology services -- is basically the crown jewel for UnitedHealth these days. Although the segment makes up less than one-third of total revenue, Optum accounted for all of UnitedHealth's earnings growth.

Several of the other big health insurers offer some of these services, but they're not at the same level as Optum. Neither Aetna nor WellPoint, for example, split out those types of services into a separate business segment. None of the other major insurers will have the growth engine that UnitedHealth has with Optum to help out if those Medicare cuts or other issues weigh down earnings.

3. More revenue isn't always a good thing
Think about this: UnitedHealthcare grew membership in its employer and individual, Medicare, and Medicaid businesses, with corresponding increased revenue -- and still made less on the bottom line than the third quarter of last year. That happens when medical and operational costs grow faster than sales grow.

Medical care ratios, which measure medical costs as a percentage of premiums received, will be important to watch for the big insurers. That will be even more critical for those companies participating heavily in the Obamacare health insurance exchanges.

UnitedHealth and Aetna have taken a cautious approach to the exchanges. Stephen Hemsley, UnitedHealth's CEO, warned that the initial wave of Americans enrolling through the exchanges could have pent-up demand for medical services.

Aetna is participating in a few state exchanges, but CEO Mark Bertolini has skewered the launch of the federally operated Obamacare exchange. Bertolini also expressed skepticism about whether enough healthy young Americans would sign up to offset high medical costs of others.

Humana and WellPoint are participating in more exchanges, though. Humana is promoting the exchanges at CVS pharmacies in 14 states. WellPoint offers insurance via Obamacare exchanges in every state where the company operates.

If Hemsley and Bertolini prove to be correct in their concerns, insurers that jumped in head-first in the Obamacare exchanges could see higher sales -- but lower earnings.

Looking ahead
Only time will tell how these factors actually impact the other major health insurance companies. As for UnitedHealth, I think the company still has plenty going for it. After gaining more than 30% so far in 2013, a relatively minor pullback isn't bad.

My view is that Optum will continue to perform well. I also suspect that UnitedHealth's wait-and-see stance with the exchanges will ultimately prove to be a smart decision. Over the long run, this should still be a stock for investors to keep on their radar screens.

Health reform winners
Obamacare is rewriting the rules for the health care industry, and in the process of doing so, it's creating massive opportunities for investors to reap rewards. How? By investing in a handful of specific health care stocks. In this free report, our analysts walk you through these opportunities and the companies that are positioned to exploit them. The informational edge contained in it is invaluable, but can only be exploited profitably while the rest of the market remains in the dark. To access this free report instantly, simply click here now.

 


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2013, at 6:34 PM, Baxter1939 wrote:

    Earnings for UnitedHealthcare, the company's health insurance business segment, dropped $199 million compared to the same period in 2012. Cuts to the Medicare Advantage program were cited as a key reason behind this decline.

    Things are going to get worst as time goes by with Obamacare robbing the Medicare Trust Fund. Obamacare is stealing from the Medicare Trust Fund. A $1 per person for each enrolled in Part A or B in 2013 and $2 per person in the years 2014 thru 2019, when you consider the number of people on Medicare these dollars can. Below is the language from page 1687 and 1688 of Obamacare law, the numbers on the left are page line numbers

    .

    Page 1687

    15 ‘‘TRUST FUND TRANSFERS TO PATIENT-CENTERED

    16 OUTCOMES RESEARCH TRUST FUND

    17 ‘‘SEC. 1183. (a) IN GENERAL.—The Secretary shall

    18 provide for the transfer, from the Federal Hospital Insur

    19 ance Trust Fund under section 1817 and the Federal Sup

    20 plementary Medical Insurance Trust Fund under section

    21 1841, in proportion (as estimated by the Secretary) to the

    22 total expenditures during such fiscal year that are made

    23 under title XVIII from the respective trust fund, to the

    24 Patient-Centered Outcomes Research Trust Fund (re

    25 ferred to in this section as the ‘PCORTF’) under section

    .

    Continued on Page 1688

    1 9511 of the Internal Revenue Code of 1986, of the fol

    2 lowing:

    3 ‘‘(1) For fiscal year 2013, an amount equal to

    4 $1 multiplied by the average number of individuals

    5 entitled to benefits under part A, or enrolled under

    6 part B, of title XVIII during such fiscal year.

    7 ‘‘(2) For each of fiscal years 2014, 2015, 2016,

    8 2017, 2018, and 2019, an amount equal to $2 mul

    9 tiplied by the average number of individuals entitled

    10 to benefits under part A, or enrolled under part B,

    11 of title XVIII during such fiscal year.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2688219, ~/Articles/ArticleHandler.aspx, 12/19/2014 8:53:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement