By Dow Jones Business News, October 17, 2013, 01:28:00 PM EDT
By Timothy W. Martin
Shares in UnitedHealth Group Inc. ( UNH ) were recently down 5.2% after the nation's largest health insurer by revenue
Thursday reported muted third-quarter profit growth and issued a cautious outlook for 2014, citing expected funding cuts
from the introduction of certain provisions of the federal health law.
UnitedHealth's third-quarter profit of $1.57 billion, or $1.53 a share, met analysts' expectations but it was the
first quarter in nearly five years that the company didn't beat expectations. In addition, UnitedHealth Chief Executive
Stephen Hemsley told analysts and investors in a conference call, the company expects earnings next year "will likely
straddle, to the upside and to the downside, our updated current year performance," meaning 2014 profits could fall well
below the current consensus estimates.
The reason for the bearish 2014 outlook, Mr. Hemsley said, is that under the new health law insurers like UnitedHealth
will see lower payments for additional services beyond the basic fee-for-service Medicare program that started this year
and is scheduled to accelerate. Those Medicare Advantage programs, which offer additional perks like free gym
membership, have served as a significant driver to earnings in recent years. But UnitedHealth has noted it will see
pressure next year from planned reductions in government funding of Medicare Advantage health plans for the elderly, as
well as the implementation of certain provisions of the U.S. health-care overhaul law.
Investors took the performance and Mr. Hemsley's comments as a bad sign, and the stocks of UnitedHealth and other
insurers fell Thursday morning. UnitedHealth is considered a bellwether for the health insurance industry because it's
normally the first to report quarterly results, along with being the largest managed-care company by revenue.
UnitedHealth traded down 5.2%, or $3.92, to $71.28 early Thursday afternoon. Humana Inc., which like UnitedHealth has a
significant Medicare business, slumped 3.7%.
UnitedHealth's stock had traded up nearly 40% this year. But rolling forward, the next two years "represent periods we
have long described as challenging in the near term," said Mr. Hemsley.
Carl McDonald, a healthcare analyst for Citigroup, called the third-quarter performance and bearish outlook "a couple
of undesirable surprises." He said it was unpleasant to see the company merely meet analysts' expectations for the third
quarter, "rather than the big beats we've become accustomed to."
Insurers are facing a sea change as a result of the rollout of the new health law and launch earlier this month of
consumer exchanges. But in the run-up to the launch of the exchanges, health insurance companies have benefited, as the
tough economy kept many patients away from the doctor's offices and hospitals. Insurers have also helped drive down
costs by directing certain patients to lower-cost treatments, when possible.
Gail Boudreaux, an executive vice president at UnitedHealth, said it would be difficult to draw conclusions yet as to
the competitive market on the government-run insurance exchanges. The company has seen a wide range in premium pricing
thus far, but it expects will "come into a tighter range" in subsequent years, Ms. Boudreaux said.
UnitedHealth reported a profit of $1.57 billion, or $1.53 a share, up from $1.56 billion, or $1.50 a share, a year
earlier. Revenue rose 12% to $30.62 billion. The company also raised the low end of its full-year earnings guidance by
five cents to a range of $5.40 to $5.50.
At the end of the latest period, UnitedHealth served 89.7 million people, compared with 89.2 million in the prior
quarter and 77.6 million a year earlier.
--Nathalie Tadena contributed to this article.
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