Mednax's Troubles With UnitedHealth Group Could Remain a Worry, Analysts Say

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Shares of the medical-staffing firm Mednax tanked Thursday on news that UnitedHealth Group was ending a handful of its contracts with the company.

Mednax’s Troubles With UnitedHealth Group Could Remain a Worry, Analysts Say

Shares of the medical-staffing firm tanked Thursday on news that UnitedHealth Group was ending a handful of its contracts with the company.

https://www.barrons.com/articles/mednax-stock-unitedhealth-contracts-earnings-51582211533 mailto:josh.nathan-kazis@barrons.com Mednax’s Troubles With UnitedHealth Group Could Remain a Worry, Analysts Say By Josh Nathan-Kazis Photograph by Jonathan Nackstrand/AFP via Getty Images Mednax and UnitedHealth Group are battling over fees for medical services.

Shares of the medical-staffing firm Mednax tanked Thursday on news that UnitedHealth Group was ending a handful of its contracts with the company. Analysts say that uncertainty around the cancellation—and factors that may have contributed to the decision—could remain a serious worry for investors.

In its earnings release on Thursday morning, Mednax (ticker: MD) disclosed that UnitedHealth Group (UNH) was ending its contracts with Mednax in four states. Mednax said that the contracts represented 2% of its 2019 revenues.

The company’s fourth-quarter earnings were otherwise respectable. But shares of Mednax fell 21.2% to close at $20.96, dropping 4% to $20.11 on Friday morning.

In a note Thursday night, BMO Equity Research analyst Matt Borsch wrote that UnitedHealth Group and Mednax would likely come to an agreement allowing Mednax to keep working with the insurer in those four states. “Our bias is that the contract terminations will turn out to be a negotiating tactic by UNH and will be resolved quickly on mutually reasonable terms,” Borsch wrote. “That said, we do not have a sufficient understanding of the situation to feel confident in that view.”

The larger worry, Borsch wrote, is that the contract troubles point to broader issues over pricing and billing that could spell problems for Mednax down the road.

“The risk is that the UNH’s actions are part of a broad shift with potentially wider and longer-lasting consequences occurring in a backdrop where ‘surprise billing’ by out of-network providers is a recent political/regulatory focus,” Borsch wrote, referring to continuing efforts in Washington, D.C., to legislate fixes to high out-of-network charges for consumers. Mednax is often referred to in these discussions, though the company has said out-of-network bills represent a small portion of its revenue.

On anearnings callThursday morning, Mednax CEO Roger Medel said that UnitedHealth Group, UnitedHealthcare’s parent company, had demanded a 50% reduction in the rates it pays Mednax under the disputed contracts. “This is neither an approach nor an outcome, of course, that we will accept,” Medel said on the call.

UnitedHealthcare says Mednax’s fees are 60% higher than the average cost of doctors who provide similar services in those states, and that it is offering to pay rates consistent with those of other providers.

In a statement to Barron’s on Friday, Mednax said that it has met repeatedly with UnitedHealth Group, including as recently as last week. “At no time were these discussions presented to MEDNAX as negotiations,” Mednax said. “Rather, United reinforced its unacceptable payment terms on a ‘take it or leave it’ basis.”

UnitedHealthcare frames the dispute differently. It says that it offered Mednax a proposal in November under which it would reimburse the company at the same rates it pays other providers in three of the states, and that Mednax hasn’t made a counteroffer. It says it made a proposal in early February connected to the fourth state, and has also not received a counteroffer.

In a note Thursday, SunTrust Robinson Humphrey analyst David MacDonald wrote that the contract dispute was troubling. “While next steps are unclear, the issue is concerning/bears watching and creates an overhang,” MacDonald wrote. “We would also note that the company’s 2020 outlook does not reflect any potential impact from UNH.”

MacDonald, who rates the stock a Hold, dropped his price target to $22, from $30.

Mizuho analyst Ann Hynes, meanwhile, wrote that her estimates do not include potential financial damage from the contract dispute. “Given out-of-network billing is such a hot topic in Washington, we would expect a new contract to be reached,” she wrote. Hynes, who rates the stock Neutral, dropped her price target to $22, from $25.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.