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Medicare Advantage has been lucrative for UnitedHealth and other insurers in recent years.
Courtesy of UnitedHealthcare
When
UnitedHealth Group
reports earnings on Friday, investors will be looking for reassurance after a company executive spooked the market last month with talk of high utilization and costs in the Medicare Advantage business.
Those comments, from
UnitedHealth
’s
(ticker: UNH) CFO in mid-June, sparked a selloff in managed care names. “There are some indications that it looks a little bit like a pent-up demand, or delayed demand being satisfied,” the CFO, John Rex, said at the time.
The message was that spending would be high in the Medicare Advantage business, a privately managed version of Medicare that’s become popular with seniors, and extremely lucrative for insurers, in recent years. Companies like UnitedHealth have rushed into the Medicare Advantage business, competing for the large payments the government offers to insure Americans over the age of 65.
Higher spending on Medicare Advantage care in the quarter would mean that earnings would be weaker in the company’s Medicare Advantage business, and UnitedHealth Group shares fell 6.4% on the comments on June 14. Other managed care companies with significant Medicare Advantage businesses fell, too, notably
Humana
(HUM), which was down 11.2% that day.
Some analysts covering UnitedHealth have cut their earnings estimates for the second quarter since then. The
FactSet
analyst consensus estimate is pointing to earnings of $6.01 per share for UntiedHealth for the second quarter, and sales of $90.7 billion.
The lower Medicare Advantage earnings could have reverberations across the tightly integrated company. UnitedHealth’s Optum Health employs physicians who care for Medicare Advantage patients, some of them in arrangements where Optum receives a lump-sum payment for each patient, rather than payments for each service. Higher utilization there could weigh on Optum, in addition to the drag on the insurance division.
UnitedHealth shares are down 15.6% this year. The stock dropped 2.4% on Wednesday, amid jitters ahead of earnings.
“We suspect any softness will be mitigated by share repurchases, cost cuts, or other levers UNH can pull to support results, though ‘winning ugly’ may not support P/E expansion,” Raymond James analyst John Ransom wrote in a note out early Wednesday.
The company is scheduled to report earnings before the market opens on Friday. It has scheduled an investor call for 8:45 a.m. Eastern on Friday. Shares trade at 17.5 times earnings expected over the next 12 months, according to FactSet. That’s above
Humana
’s
valuation of 14.5 times earnings expected over the next 12 months.
UnitedHealth shares are underperforming the healthcare sector this year, and the broader market. The
Health Care Select Sector SPDR Fund
(XLV) is down 4.5% this year, while the
S&P 500
is up 17.5%.
Write to Josh Nathan-Kazis at [email protected]
Source: https://www.barrons.com/articles/unitedhealth-earnings-managed-care-23d53eb9?siteid=yhoof2&yptr=yahoo