UnitedHealth Profit Tops As Medical Costs Improve
UnitedHealth beat second-quarter forecasts and upped its full-year guidance Thursday, building on its dominant position as the medical industry remains locked in a merger melee.
The largest U.S. health insurer, which was mostly mum on M&A in its conference call, said Q2 earnings grew 15.5% to $1.64 a share, 6 cents above Street views. Revenue notched up 11% to $36.26 billion, exceeding expectations for $35.66 billion.
UnitedHealth (UNH) lifted its 2015 EPS outlook to $6.25-$6.35, largely above analysts' views of $6.26, from an earlier estimate of $6.15-$6.30. Revenue for the year is seen at $154 billion, better than consensus views for $143.6 billion, up from a prior outlook for $143 billion. Guidance includes the acquisition of pharmacy benefits manager Catamaran, expected to close this month. Shares closed down 0.7% but had been as much as 3% lower, as medical costs came in higher than some analysts expected.
'Positioned Very Well'
Earlier this month, Aetna (AET) agreed to buy Humana (HUM) for $34.1 billion, and Centene (CNC) said it would acquire Health Net (HNT) in a deal worth $6.8 billion. Anthem (ANTM) and Cigna (CI) are also reportedly edging closer to a deal.
Following the Affordable Care Act, insurers have moved to consolidate as a way to manage expenses amid tighter regulation. UnitedHealth was said to be considering bids for Aetna and Cigna, but Morningstar analyst Vishnu Lekraj doubts the company needs to engage in the frenzy.
"I don't think they need to make a move," he told IBD. "They're positioned very well. (UnitedHealth is) the largest, most diversified (managed-care organization) post any liquidation or consolidation activity.
But potential contract losses could be a byproduct of Catamaran's integration with OptumRx, he added, noting that a major client of Catamaran is UnitedHealth rival Cigna.
Such client defections have also followed other large pharmacy benefit management integrations, such as 2012's Express Scripts (ESRX)-Medco deal and 2007's CVS Health (CVS)-Caremark merger, he said.
But for now, Optum continues to help drive growth. In Q2, revenue from the health services unit rose 16%. UnitedHealthcare Community and State revenue rose 25%, while UnitedHealthcare Global's Q2 revenue fell 18%. Employer and Individual unit revenue grew 10% in Q2. Medicare and Retirement revenue rose 7%.
How Low Can Costs Go?
UnitedHealth's total medical membership as of June 30 rose to 45.86 million from 45.77 million as of March 31.
The consolidated medical loss ratio, or the share of premium revenue spent on services, improved in Q2, shrinking by 20 basis points to 81.4%. But some Wall Street analysts anticipated a ratio below 81%.
Given the growth of certain higher-cost membership cohorts such as those in Medicare, Medicaid and health exchanges, Lekraj said he didn't expect the MLR to go even lower.
RBC Capital Markets analyst Frank Morgan also did not seem fazed by the medical costs.
"We continue to view UNH as a core holding in the health care segment that can drive attractive, sustainable long-term growth even with its industry-leading size, and view this morning's weakness as a buying opportunity," he wrote in a Thursday note.
Insurer stocks fell earlier this year on indications that hospitals were seeing a surge in admissions, meaning increased costs for insurers. In April, hospital operator HCA Holdings (HCA) said Q1 same-facility visits grew 5.1% and same-facility emergency-room visits jumped 11.5%.
In May, LifePoint (LPNT) reported a 17% increase in Q1 comparable admissions, with total surgeries up 24.3%, and emergency room visits up 22.4%.
But managed-care and hospital stocks got a lift in June following the Supreme Court's decision to uphold ACA subsidies.
UnitedHealth is the first major health insurer to report earnings. Anthem and Humana both report on July 29. Aetna reports on Aug. 4.
