A major public-sector client's switch to a lower-cost self-insured coverage plan will cost UnitedHealth Group (UNH) about $2.5 billion in revenue this year, while sequestration-tied lower Medicare reimbursement rates will pressure profits.
The largest U.S. health insurer and first to report first-quarter results said Thursday that earnings fell 11% to $1.16 a share, the first decline in years. But that was 2 cents more than analysts surveyed by Thomson Reuters expected. It blamed lower Medicare reimbursement rates.
The roughly 2% cut for Medicare Advantage (MA) and Part D programs that came with sequestration on April 1 means a $250 million to $300 million hit over the remainder of 2013, UnitedHealth said.
That's on top of MA rate reductions related to ObamaCare.
In addition, an administration proposal to further slash Advantage reimbursements was largely reversed early this month. That news sent HMO stocks soaring in early April.
But altogether those cuts — although not as deep as early proposals — are harsher than expected or modeled, CEO Stephen Hemsley said.
"We will take the time to fairly assess the implications to our 2014 UnitedHealth Group growth outlook and whether our growth expectations for 2014 can be sustained in light of the continuation of both sequestration and a significantly greater rate setback than anyone could have expected," he said in a conference call with analysts.
UnitedHealth fell 4% to 59.69 in the stock market. Rivals fell on worries the pain would not be contained. Centene (CNC), which reports Tuesday, lost 2%. WellPoint (WLP), which reports Wednesday, fell 3%. So did Humana (HUM), which reports May 1. Cigna (CI), reporting May 2, slid 1%.
UnitedHealth's Q1 revenue rose almost 11% to $30.3 billion, thanks largely to a gain of 1.1 million members over the past year for a total of 86 million.
During the quarter, the insurer said a municipality switched its 1.1 million members from a fully insured risk-based plan to a self-insured fee-based option. That's common for a group that big. With self-insurance, the customer pays for its employees' health care use, while the insurer administers the plan for a fee.
UnitedHealth said the expected 2013 revenue hit of $2.5 billion will be partially offset by higher-than-expected overall business growth. Still, it lowered revenue guidance to $122 billion from a range of $123 billion to $124 billion. That would be a a 10% increase from 2012. Analysts had expected $123.76 billion.
United Health reaffirmed full-year EPS guidance of $5.25 to $5.50, but said sequestration pressures the top end of that range. Analysts forecast $5.51.
'Snatching Defeat' Susquehanna Financial analyst Christian Rigg described management as "snatching defeat from the jaws of victory," with mostly decent numbers, but unusually bearish long-term commentary.
"Substantially all of the concerns over 2014 have shifted to the government segments, which had previously been viewed as the buffer to the commercial challenges," Rigg wrote in a note to clients.
"We continue to view UNH as a core holding for health care investors, but near-term company shares will likely have a difficult time finding higher ground given 2014 MA uncertainties," he wrote.