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Earnings Roundup: Did Obamacare Swamp United Healthcare's Quarter?

We'll have to wait a few more days to hear how reform affected private Medicaid insurers Molina Healthcare (NYSE: MOH  ) and Centene (NYSE: CNC  ) , but if United Healthcare's (NYSE: UNH  ) results are any indication, Medicaid results will offer strong tailwinds for them. That's because rising Medicaid membership tied to Obamacare drove United's Medicaid revenue sharply higher, helping lift United's overall revenue by 5%, to $31.7 billion in the quarter.

However, the pop in Medicaid membership did little for United's bottom line, which declined from last year. Given the bipolar top line and bottom line results, lets take a closer look at what's behind United's first quarter performance.

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Commercial sags, Medicaid surges
United provided insurance coverage to 2.7 million more people in the first quarter than a year ago, and that led to revenue growing from $28.3 billion last year to $29.3 billion this year. While the addition of 2.7 million new members is significant, many of those new members came from winning the contract to provide insurance for the U.S. Military's Tricare program, not from reform. In fact, despite the year-over-year growth, enrollment in United's commercial plans actually fell by 780,000 people during the quarter, causing revenue to sag $103 million from last year to $11 billion.

However, before we blame the decline on reform, the slide wasn't tied to people dropping-off commercial plans because of the ACA. Instead, it was due to the loss of a large state employer contract and, for lack of a better term, planned attrition through pricing. Regardless, that commercial drop-off weighed down gains in United's Medicare Advantage and Medicaid plans.

Medicare product sales grew more than $320 million, to $11.5 billion in the quarter from a year ago, up 3% thanks to enrollment in Medicare Advantage plans improving by 4%. Both Medicare Supplement and Medicare Part D membership grew 9% versus last year, too.

But the unquestionable star of the show last quarter was Medicaid. Mandated expansion in states served by United helped the Community & State segment (of which Medicaid is a part) revenue jump 17% year over year, to $5.2 billion. Overall, United added 255,000 new Medicaid members in the first quarter, bringing its total Medicaid membership growth from last year to 10%.

Those results should bode well for insurers Molina and Centene, which get the lion's share of their revenue from running state Medicaid programs.

In February, Molina offered guidance to investors that revenue would reach $9.9 billion in 2014, translating into earnings per share of between $4 and $4.50 per share -- far higher than the $3.13 the company earned in 2013. That bullish forecast stems from both of Molina's biggest markets, California and Washington, embracing Medicaid expansion. Exiting the fourth quarter, those two states made up 40% of all of Molina's Medicaid members.

Centene may not do as well as Molina, given it has heavy exposure to states that didn't sign on for Medicaid expansion, including Texas, but it's still expecting a big jump in revenue this year. In February, Centene forecast 2014 sales will total between $13.8 billion and $14.3 billion, resulting in EPS of $3.50 to $3.80 per share. For comparison, Centene's revenue was $10.5 billion last year and it earned $2.95 per share.

Cost of doing business
One of investors' major concerns heading into earnings is whether early adopters of Obamacare this past winter were those with expensive, pre-existing conditions. Caring for those customers, some argued, could significantly disrupt profitability by increasing insurers medical care ratio, or MCR. That risk appears to have been mitigated at United given that its MCR dropped to 82.5% in the first quarter, which is 0.2 percentage points below last year.

However it wasn't all great news on the expense front. Costs tied to reform and sequestration did shave $0.35 in earnings per share off the bottom line in the quarter, according to the company.

Despite the company's net margin being essentially unchanged from last year, operating earnings fell from $2.1 billion a year ago to $2.05 billion in Q1, leading to earnings per share falling from $1.16 last year to $1.10. Overall, the results appear to be in line with what United's C-Suite was expecting exiting the fourth quarter, given United kept its full year 2014 sales forecast at $128 to $129 billion, and earnings guidance at $5.40 to $5.60 per share. As I pointed out previously, if United comes in at that earnings range, it would represent little to no growth from 2013.

The business of technology
A big part of United's overall revenue growth, however, wasn't tied -- at least directly -- to reform-driven membership growth. Instead, it came from United's technology and consulting business, Optum. Sales at Optum jumped nearly 30%, to $11.2 billion in the quarter. However, investors should remember that roughly $8.7 billion of those sales are from United's insurance business, and are eliminated when calculating United's consolidated sales.

Regardless, demand for health-care data, IT services, and consulting continues to rise at health-care payers, providers, employers, and life-sciences companies. That demand is driven by the industry grappling with ever-changing regulations and hunting for cost-savings.

Within Optum, the fastest growing business was OptumRx. OptumRx revenue grew 44% in the past year as it handled 38% more scripts for payers hoping to thin prescription costs. That volume boost helped Optum Rx contribute $242 million in operating earnings this quarter, up from $113 million a year ago.

Optum also saw strong demand for OptumInsight. Demand for the company's Optum360 revenue management platform helped drive OptumInsight's backlog 18% higher, and helped sales at the unit climb 8%, to $1.2 billion in the quarter.

Fool-worthy final thoughts
Membership growth helped United's operating cash flow jump by a third, to $1.4 billion from last year. That cash helped fuel the buyback of $911 million in stock during the quarter and the payout of $276 million in dividends to investors, up 28% from last year.

Without reform, net margin would have been 1.1% better than the 3.5% United reported, and earnings would have been $0.35 higher. However, United also wouldn't have had the benefit of growth for its Medicaid business. That strength is likely to help lift results for other insurers, especially private Medicaid companies Molina and Centene. For now, investors should be encouraged that United's results, while mixed, were solid. 

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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