Obamacare and Medicare Reimbursement Cuts Weigh on UnitedHealth Group in Q1

Lower Medicare reimbursements and the implementation of the ACA lower UnitedHealth Group's EPS by nearly $0.35 in a challenging first quarter.

Apr 17, 2014 at 1:05PM

The nation's largest health insurer, UnitedHealth Group (NYSE:UNH), kicked off earnings season for the rest of the sector today by reporting a modest increase in revenue and strong growth in services revenue offset by weakness stemming from the implementation of the Affordable Care Act and reduction in Medicare reimbursements in the first quarter.

For the quarter, UnitedHealth Group delivered a 4.5% increase in total revenue to $31.7 billion, driven in large part by its Optum segment. For Optum, revenue rose 29% to $11.2 billion, aided most by its OptumRx pharmacy business, which saw script volume rise 38% year over year.

UnitedHealth's traditional health-benefits business delivered mixed results. On one hand its community and state revenue rose 17% and, in spite of sequestration funding cuts that resulted in lower Medicare reimbursements, its Medicare and retirement segment revenue rose 3%. This was offset, though, by a 780,000-member sequential-quarter decrease in the number of people served. UnitedHealth also reported that fee-based business decreased by 705,000 people during the quarter.

Where the effects of Obamacare and sequestration cuts were really observed was in UnitedHealth's bottom line. Overall, net income fell 7.8% to $1.1 billion from $1.19 billion in the year-ago quarter. This translated into EPS of $1.10 with a negative impact from the ACA and sequestration cuts of nearly $0.35 per share as noted by the company. Operating margins also fell 90 basis points to 4.8%.

It wasn't all bad, however, as cash flow from operations increased an impressive 34% from the year-ago quarter to $1.4 billion and its medical care ratio -- a measure of how much it spends on medical costs versus how much it brings in with premiums -- actually fell 20 basis points to 82.5%. A lower number here is more preferable, signifying the company is doing a good job of controlling internal costs. 

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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