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UnitedHealth Sees A Squeeze As Medicare Changes Take Hold

UnitedHealth Group (UNH) kicked off health insurers' earnings season Thursday with a thud, tumbling 5% at the market close after it posted lower-than-expected revenue in Q3 and suggested that next year's earnings would miss analysts' estimates due to ObamaCare cuts to Medicare payments.

The country's largest health insurer just met Q3 earnings estimates of $1.53 cents a share, up 2% from a year ago. And though revenue rose 12% to $30.6 billion, it was below the $30.8 billion analysts had expected.

Analyst David Windley said in a note Thursday that he was expecting earnings to beat by 5-10 cents because of continued low levels of health care utilization. But UnitedHealth's management said that Wall Street shouldn't expect low utilization levels to continue.

UnitedHealth tightened its 2013 earnings outlook to a range of $5.40-$5.50 a share from $5.35-$5.50 previously. The mid-point of that range, $5.45, implies a 13% increase over last year vs. analysts' expectations of 19% growth.

UnitedHealth said government cuts to Medicare Advantage pressured results, and sequestration cuts reduced 2013 EPS by 15 cents. The cuts were also factors in its consolidated medical care ratio rising 160 basis points over last year to 80.6%. And the insurer expects further pressures in 2014 when health care reforms take effect.

The company is the leading provider of Medicare Advantage plans; it has said it would withdraw some Advantage plans in 2014.

CEO Stephen Hemsley said in a post-earnings conference call that 2014 earnings could also fall short of estimates due to lower Medicare Advantage funding levels as well as certain changes under ObamaCare, including lower payments for certain Medicare services beyond basic coverage.

Referring to the effects of the nondeductible insurer fee on Medicare, Hemsley said "the significant and continued level of underfunding cannot be fully offset in 2014" by other positive trends in its health benefits' business.

He added that 2014's earnings would likely "straddle to the upside or the downside" of this year's tightened guidance, meaning earnings could fall below Wall Street's views for 6% growth.

Management indicated in the call that it expects a "stronger performance" in 2015 as it adjusts.

Organic enrollment grew by 4.35 million individuals year to date.

Other "Big Five" insurers WellPoint (WLP), Aetna (AET) and Cigna (CI) will report Q3 earnings later this month, and Humana (HUM) early in November.

WellPoint, Aetna, Humana and Cigna shares all closed down.