What happened

Shares of Mednax (NYSE:MD) were tumbling 21.2% at 12 p.m. EST Thursday after management reported fourth-quarter earnings per share (EPS) that fell shy of industry watchers' expectations and that the nation's largest insurer, UnitedHealth Group (NYSE:UNH) is cancelling contracts with its physician groups. 

So what

Mednax is one of the biggest providers of neonatal and anesthesia services to medical facilities. Its revenue has climbed thanks to acquisitions of smaller provider groups. Unfortunately, higher costs associated with paying its specialists have created headwinds to its profit growth.

A man holds his head in his hands while looking at a declining stock price chart.

Image source: Getty Images.

In Q4 2019, revenue inched up 1.9% year over year to $905.4 million. That was $4.5 million better than analysts wanted, but its EPS under generally accepted accounting principles (GAAP) of $0.40 missed the mark by $0.09. For the full year, revenue increased to $3.51 billion from $3.45 billion in 2018, but adjusted EPS from continuing operations fell to $3.38 from $3.55 in 2018.

The news that UnitedHealth Group has cancelled contracts with Mednax in four states for all its services increases concern that the company's earnings will face greater pressure this year. The contracts had effective dates ranging from March 1 to Sept. 1, 2020 and accounted for about 2% of Mednax's annual revenue last year. Mednax expressed hope that it can come to terms with UnitedHealth, but pushback against out-of-network bills for patients may put insurers in the driver's seat in negotiations.

Now what

A larger, longer-living population provides tailwinds to long-term demand for this healthcare company's services, but expense control could remain a problem. Practice salaries and benefits increased to 71.4% of revenue in 2019 from 70.2% in 2018 and uncertainty associated with UnitedHealth's decision led to management acknowledging it's "not able to forecast the outcome of this matter, nor estimate the potential impact to its results."

Given the headwinds, investors should probably focus on other stocks until there's more clarity, rather than trying to buy Mednax on sale.