UnitedHealth First-Quarter Profit Falls on Medicare Cuts

Apr 17, 2014 4:06 pm ET

(Updates with closing shares in seventh paragraph.)

April 17 (Bloomberg) -- UnitedHealth Group Inc., the biggest U.S. health insurer, said profit fell 7.8 percent, hurt by cuts to its Medicare Advantage program for elderly and disabled Americans. The shares declined the most in six months.

Net income decreased in the first quarter to $1.1 billion, or $1.10 a share, from $1.19 billion, or $1.16, a year earlier, the Minnetonka, Minnesota-based company said today in a statement. Earnings beat by 1 cent the $1.09 per share average of 22 analyst estimates compiled by Bloomberg.

UnitedHealth has derived growth from Medicare and has the biggest program among publicly traded insurers, with 3 million enrollees. In April, the government implemented a second round of cuts to Medicare Advantage, insurers’ private version of the program, as required under the Patient Protection and Affordable Care Act.

Without this loss, “they would’ve been at $1.45 this quarter, and that’s a lot of growth,” Sheryl Skolnick, a Stamford, Connecticut-based analyst at CRT Capital Group, said in a telephone interview. “Between the sequestration, the tax, and the Medicare Advantage cuts, that’s a big nut to overcome.”

Medicare’s actuaries have said the cuts will result in a decline in enrollment for the first time since 2004. The cuts, along with the impact of sequestration and other health reform fees, reduced UnitedHealth earnings by about 35 cents a share, according to today’s statement.

2015 Cuts

UnitedHealth estimates that total cuts to Medicare Advantage in 2015 will be 3 to 3.5 percent, Chief Executive Officer Stephen Hemsley said in a conference call today, calling the final rate cut “somewhat disappointing.”

Shares fell 3.1 percent to close at $75.78 in New York, the biggest drop since Oct. 18.

Revenue rose to $31.7 billion from $30 billion a year ago, as its Optum technology business helped to offset the Medicare Advantage cuts. While UnitedHealth has limited exposure to the public exchanges, its Optum unit has been credited with helping to fix the federal website for Obamacare plans, and has since been hired by several state websites. Revenue from the Optum unit jumped 29 percent to $11.2 billion.

“There’s a lot of reliance on Optum,” Skolnick said. “When you’re growing a part of your business, even a relatively small part, at that clip, it’s meaningful.”

UnitedHealth is the first of the major insurance companies to report earnings this quarter.