Why UnitedHealth Group Will Move the Dow Tomorrow

Earnings season continues as the health-insurance giant reports. Find out what to expect.

Jul 16, 2014 at 12:30PM

The strong results we've seen in the first week of earnings season have helped push the Dow Jones Industrial Average (DJINDICES:^DJI) to fresh intraday highs. Yet tomorrow morning, Dow investors will get a new read on the economy from a different perspective, as health-insurance giant UnitedHealth (NYSE:UNH) will give its latest results. Even as most investors will be focused on how UnitedHealth does compared to WellPoint (NYSE:ANTM) and other insurance peers, UnitedHealth's results will have implications for Dow companies elsewhere in the health care sector. With reform affecting all corners of the health care market, investors can't afford to watch only a single part of the sector to get a full understanding of the state of the industry.

UnitedHealth expects to release its earnings report before the market opens Thursday morning -- last quarter's report was available to the public just after 6 a.m. EDT. The Dow component will then hold a conference call at 8:45 a.m. EDT to discuss the results.

Source: UnitedHealth.

Investors aren't entirely confident about UnitedHealth's prospects, with expectations that revenue will rise while net income levels fall. It's tempting to blame health care reform for the earnings shortfall, and indeed, adapting to the new requirements of the Affordable Care Act and other federal program guidelines has taken substantial effort for UnitedHealth. One of the biggest risks that UnitedHealth, WellPoint, and their peers have to deal with is the potential for dramatic cuts in reimbursement rates from Medicare and other federal and state-government programs. Obamacare in particular has increased reliance on Medicaid, and while that has helped bolster customer counts for health insurers, it also makes insurers even more dependent on what the government decides is appropriate payment for the services that UnitedHealth and its peers arrange for.

But UnitedHealth faces some other issues that have held back its performance recently. Pharmaceutical companies both within and outside the Dow Jones Industrial Average have seen substantial growth lately, with blockbuster drugs coming to market and helping to replace revenue from older drugs that have lost patent protection. For UnitedHealth, WellPoint, and other health insurers, though, brand-name drugs represent a huge cost of business, eating into their profit margins and diverting income toward pharma giants. Similarly, medical-device innovations can boost prospects for the companies that produce and sell them, but high-priced equipment often leads to higher costs for procedures, and that can crimp UnitedHealth's profits as well.

UnitedHealth will move the Dow tomorrow as investors look not only at the prospects for the health insurance industry, but also at its interaction with drug companies and other health care providers. In the fixed-sum game of health-care reform, gains for UnitedHealth almost certainly come at the expense of other players in the industry, and Dow investors must accurately assess which companies will feel the brunt of any pain that helps UnitedHealth boost its profits.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. 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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