UnitedHealth sees Medicare payment shortfall, shares drop

Reuters

By Caroline Humer

Oct 17 (Reuters) - UnitedHealth Group Inc onThursday predicted a tough year in 2014 because of governmentfunding cuts to its private Medicare business, dragging down itsshares and those of its competitors.

UnitedHealth Chief Executive Stephen Hemsley said that"underfunding" of Medicare Advantage plans for the elderlycannot be fully offset by the company's other healthcarebusiness. UnitedHealth, the largest U.S. health insurer, haspreviously said that it plans to withdraw from some markets in2014 because of these cuts.

As a result, Hemsley told investors during a call todiscuss quarterly results, the company's 2014 earnings may beeither lower or higher than its forecast 2013 profit, which itnarrowed to $5.40 to $5.50 per share.

Sarah James, an analyst at Wedbush Securities said investorswere expecting UnitedHealth profits to be flat to higher in 2014compared with this year, "with no real downside possibility."UnitedHealth's view that 2014 profits could in fact fall wasbehind the drop in sector shares, she said.

Shares of UnitedHealth, which had gained 38 percent sincethe start of this year, fell 4.6 percent to $71.75. It is thefirst of the insurers to report its third-quarter results, andshares of WellPoint Inc, Aetna Inc, Cigna Corp and Humana Inc fell on the news.

UnitedHealth and other U.S. insurers are preparing forfar-reaching changes in the next two years as President BarackObama's healthcare reform law takes full effect. The company isparticipating in about a dozen new state insurance markets thatlaunched on Oct. 1 to offer subsidized health coverage.

The new state exchanges, an expansion of the Medicaidprogram for the poor, better care by healthcare providers at alower cost, and changes in funding for Medicare and Medicaidcould create future opportunities, Hemsley said. But, he said,2014 and 2015 will be challenging.

MAJOR MARKET SHIFTS

UnitedHealth reported a third-quarter profit that metanalyst forecasts, but investors have come to expect the companyto beat such expectations.

Earnings were little changed, rising to $1.57 billion, or$1.53 per share, from $1.56 billion, or $1.50 per share, a yearearlier.

UnitedHealth said revenue increased 12 percent to $30.6billion, slightly below analysts' estimates of $30.8 billion,according to Thomson Reuters I/B/E/S.

Gail Boudreaux, who runs the company's healthcare business,said that prices for new insurance plans being sold on the state"Obamacare" exchanges vary a lot, reflecting such factors aswhether an insurer offers a narrow or broad network of doctorsand other providers. She expects those variations to narrow overtime.

UnitedHealth said its business providing coverage foremployer-sponsored health plans is also changing, ascorporations have started shifting how they provide healthcarebenefits. Some are experimenting with sending both retirees andactive employees to private healthcare exchanges to buy theirinsurance.

The company said that its commercial insurance enrollmentwould decline in 2014 from this year because of the move amongnational accounts to private exchanges. It also has about900,000 customers in the individual market who could be affectedby the new public exchanges.

OPERATING COSTS RISE

UnitedHealth said it spent 80.6 percent of healthcarepremiums on medical claims, a rise of 160 basis points from ayear earlier, due to government cuts to payments for MedicareAdvantage services.

The company also spent more because it had a largerpercentage of revenue from government-paid plans, which carrylower profit margins.

"Unprecedented levels" of growth in the fee-based businessof administering benefits for corporations and internationalgrowth of the benefits administration business contributed tohigher operating costs, it said.

UnitedHealth said it had 45.3 million people enrolled inhealth plans as of Sept. 30 and added a total of 275,000 membersduring the quarter, helped by increases in Medicaid and MedicareAdvantage membership. Its international large-group businessalso expanded.

UnitedHealth said 5.7 million consumers, or nearly 20percent of the total members in employer-sponsored or individualplans, were in high-deductible plans as of Sept. 30.

UnitedHealth raised the low end of its 2013 earnings outlookto $5.40 a share from $5.35 while keeping the high end at $5.50.Analysts are expecting $5.51 per share. The company forecastfull-year revenue of $122 billion, compared with analysts'estimates of $122.7 billion.

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