Could This Constrict UnitedHealth's 2014?

Could This Constrict UnitedHealth's 2014?

UnitedHealth Group's recent third-quarter report featured a 12% year-over-year revenue growth to $30.6 billion. But the earnings call talk slanted toward an Obamacare component that could constrict UnitedHealth's 2014 guidance.

Management has repeatedly stressed the company's "modest" involvement in the public Obamacare health insurance exchange. But crackdowns on the government-backed Medicare Advantage plans were blamed for diminishing operating margins in the quarter and pegged as a continuing headwind for next year.

What's the deal with Medicare Advantage plans -- and how much do they matter to UnitedHealth's future?

What's Medicare Advantage?
Traditional government-sponsored Medicare plans include types A and B-- also called original Medicare -- which cover hospital stays and doctors visits. Private insurers sell part D plans for prescription coverage -- and Medicare Advantage plans, which combine the other three types often with a side of additional benefits.

Private insurers want to offer Medicare Advantage plans because they're government-backed contracts. So the insurers received government money on top of the premium revenues collected from members. And there wasn't a lot of restriction on how the insurers could use that money.

But the Affordable Care Act, commonly known as Obamacare, has a medical loss ratio requirement that forces insurers to use a set percentage of premium revenues for patient care. Companies that don't use 80% to 85% of revenues on care are forced to issue rebates to members for the difference.

And that's not the only way Medicare Advantage spending is tightening.

Advantage constriction
UnitedHealth blamed the 8.6% operating margin decrease in the third quarter largely on this year's Medicare Advantage rate cuts. Proposed rate cuts for next year caused an insurer panic earlier this year. But the Centers for Medicare and Medicaid Services, or CMS, backed away from its proposed 2% rate cut and instead plans a 3% increase.

But that rate increase is still lower than in previous years, which is why UnitedHealth's saying that rates will contribute to the company adjusting its 2014 guidance during its investor conference in January.

UnitedHealth's Advantage dependency
But UnitedHealth investors don't need to worry about the Medicare Advantage rates as much as, say, Humana investors. That's because Medicare Advantage members make up a smaller percentage of UnitedHealth's covered lives. And that explains why Humana shares dropped 10% when the CMS proposed a rate cut while UnitedHealth barely budged.

Here's a comparison of the second quarter covered lives, since Humana hasn't reported its third quarter yet:

Covered Lives*

Medicare Advantage










Source: Company press releases. *Medical coverage only; excludes dental, Part D stand-alone, etc.

Why's Medicaid included in the table? That government-backed program is also undergoing Obamacare changes. States were given the choice to participate in a Medicaid expansion program that would've widened the umbrella to include low-income people who currently have an income too high to qualify. More patients leads to more profit potential for insurers. And UnitedHealth has more exposure to Medicaid than Medicare Advantage.

But according to the Advisory Board, only 21 states have firmly agreed to participate in the expansion while 15 have flat-out rejected the plan. The rest of the states have time to decide since there's no firm signup deadline.

Foolish final thoughts
Will Medicare Advantage cuts constrict UnitedHealth in 2014? Sure -- but not as much as competing insurers such as Humana, which have more exposure. UnitedHealth is more dependent on the Medicaid expansion and the outcomes of its private exchange performance, since the company's only dipping a toe into the federal exchange.

All of the insurers face a bumpy path under Obamacare as everything falls into place. So expect a lot of readjustments for the near future. But investors can tune into UnitedHealth's investor day on Jan. 15 for a better idea of what the company sees as its future.

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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