UnitedHealth Group Inc. Earnings: Can They Grow Despite Obamacare?

On Thursday, UnitedHealth Group (UNH -0.28%) will release its quarterly report, and investors have anticipated solid results from the health-insurance company by bidding its share to new all-time highs in recent weeks. Yet even as UnitedHealth and rivals WellPoint (ELV 0.66%) and Humana (HUM 0.05%) have struggled to deal with and incorporate the health-care reforms under Obamacare into their respective business models, UnitedHealth hopes to find new avenues for growth in areas that WellPoint and Humana have largely left untapped.

Investors have been nervous about the impact of Obamacare on health-insurance companies for years, figuring that the requirement that UnitedHealth Group and its peers accept patients with pre-existing conditions would require a massive hit to earnings. Now that the individual mandate has taken effect, the question for UnitedHealth is whether greater numbers of enrollees will make up for the negative impact of higher losses from those who used to be relegated to high-risk pools and other backwaters of the insurance industry. Let's take an early look at what's been happening with UnitedHealth Group over the past quarter and what we're likely to see in its report.

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Stats on UnitedHealth Group

Source: Yahoo! Finance.

Which way will UnitedHealth Group earnings move?
In recent months, analysts have had negative views on UnitedHealth earnings, cutting their first-quarter estimates by a dime per share and making similar reductions to their 2015 full-year projections. The stock, though, has done well, rising 4% since early January.

UnitedHealth Group's fourth-quarter earnings report showed the tale of two businesses that are driving the health-insurance giant's results. Overall, UnitedHealth's revenue rose 8% on membership growth of 170,000 people, and net earnings jumped 18% from the year-ago quarter. Although its traditional insurance business did reasonably well, UnitedHealth Group's biggest growth came from its Optum health-care services division, which enjoyed a 35% gain in sales that came largely from a boost in pharmacy-services revenue.

Yet Obamacare has been a wildcard for UnitedHealth Group and the entire health-insurance industry. WellPoint took an aggressive stance on health-care insurance exchanges, while UnitedHealth Group and some of its peers were more conservative about waiting to see how the exchanges played out. Now that the individual mandate has taken effect, analysts are still uncertain whether the actual mix of new enrollees under Obamacare will lead to greater profits or greater losses for UnitedHealth and other insurance companies. Some demographic studies have found that a relatively small number of Obamacare participants actually lacked insurance coverage prior to enrolling, with gains in employer-sponsored insurance and Medicaid enrollment being offset by millions of previously insured Americans losing their previous coverage.

Another big challenge for UnitedHealth Group could come from Medicare Advantage, where reimbursement rates are under constant threat. Still, UnitedHealth has maintained a relatively modest exposure to Medicare Advantage compared to Humana, which gets more than two-thirds of its earnings from the government program. Moreover, favorable indications that reimbursement rates for Medicare Advantage might not drop as much as had originally been feared led to a brief pop for UnitedHealth and Humana in late February, proving that volatility related to government-program revenue can work both ways.

Still, UnitedHealth Group is seeking to maximize all of its growth opportunities. Its pharmacy benefit management business handles $30 billion in operations, and UnitedHealth's decision in 2011 to bring that business in-house has opened the door to potentially huge profit growth. At the same time, UnitedHealth Group's foray oversees to buy Brazilian insurer Amil two years ago gives UnitedHealth some diversification from the risks involved in its U.S. operations.

In the UnitedHealth Group earnings report, watch to see how Obamacare affects the health insurer's first-quarter results. With full implementation just now taking effect, it'll be interesting to see whether the long-anticipated benefits to Obamacare outweigh the costs that UnitedHealth Group has to bear under the program.

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