3 Implications for Big Insurers From UnitedHealth's Q3 Results
Wall Street clearly isn't happy with UnitedHealth Group . Shares fell more than 5% after the company reported its third-quarter results. Were the numbers that bad? Not really.
Revenue jumped 12% year-over-year to $30.6 billion. Earnings were up a smidgeon -- from $1.56 billion, or $1.50 per share, a year ago to $1.57 billion, or $1.53 per share, in the last quarter. But UnitedHealth usually beats expectations. It didn't do so this time around. Furthermore, the company narrowed its full-year guidance but kept the top end of the range intact.
UnitedHealth is the first major insurer to announce earnings. What does the company's ho-hum numbers possibly mean for the rest of the industry? Here are three factors from UnitedHealth's third-quarter results that could make a big difference for other insurers, too.
1. Medicare cuts take their toll
Earnings for UnitedHealthcare, the company's health insurance business segment, dropped $199 million compared to the same period in 2012. Cuts to the Medicare Advantage program were cited as a key reason behind this decline.
Other big insurers will probably also take a hit from these cuts. WellPoint counted nearly 1.5 million Medicare members last quarter. That's not nearly as large as UnitedHealth's 2.97 million Medicare Advantage customers and 3.4 million Medicare Supplement customers, but it's still a sizable number.
Humana could really feel a sting from the cuts. Medicare products made up nearly three-quarters of the company's total premiums and services revenue in the first half of 2013.
Aetna wouldn't feel the brunt of the cuts as much as Humana. The large insurer received around 25% of total revenue from Medicare-related programs in the first half of the year. That's still a significant part of the company's business, though.
2. OK becomes not OK without ancillary businesses
Increasing earnings by only 1% year over year isn't great, but at least the bottom line is improving. But if you dig into UnitedHealth's results, you'll find that the only reason that earnings growth occurred was because of the company's Optum business segment.
Optum -- which provides pharmacy benefit management, health care consulting, and technology services -- is basically the crown jewel for UnitedHealth these days. Although the segment makes up less than one-third of total revenue, Optum accounted for all of UnitedHealth's earnings growth.
Several of the other big health insurers offer some of these services, but they're not at the same level as Optum. Neither Aetna nor WellPoint, for example, split out those types of services into a separate business segment. None of the other major insurers will have the growth engine that UnitedHealth has with Optum to help out if those Medicare cuts or other issues weigh down earnings.
3. More revenue isn't always a good thing
Think about this: UnitedHealthcare grew membership in its employer and individual, Medicare, and Medicaid businesses, with corresponding increased revenue -- and still made less on the bottom line than the third quarter of last year. That happens when medical and operational costs grow faster than sales grow.
Medical care ratios, which measure medical costs as a percentage of premiums received, will be important to watch for the big insurers. That will be even more critical for those companies participating heavily in the Obamacare health insurance exchanges.
UnitedHealth and Aetna have taken a cautious approach to the exchanges. Stephen Hemsley, UnitedHealth's CEO, warned that the initial wave of Americans enrolling through the exchanges could have pent-up demand for medical services.
Aetna is participating in a few state exchanges, but CEO Mark Bertolini has skewered the launch of the federally operated Obamacare exchange. Bertolini also expressed skepticism about whether enough healthy young Americans would sign up to offset high medical costs of others.
Humana and WellPoint are participating in more exchanges, though. Humana is promoting the exchanges at CVS pharmacies in 14 states. WellPoint offers insurance via Obamacare exchanges in every state where the company operates.
If Hemsley and Bertolini prove to be correct in their concerns, insurers that jumped in head-first in the Obamacare exchanges could see higher sales -- but lower earnings.
Only time will tell how these factors actually impact the other major health insurance companies. As for UnitedHealth, I think the company still has plenty going for it. After gaining more than 30% so far in 2013, a relatively minor pullback isn't bad.
My view is that Optum will continue to perform well. I also suspect that UnitedHealth's wait-and-see stance with the exchanges will ultimately prove to be a smart decision. Over the long run, this should still be a stock for investors to keep on their radar screens.
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The article 3 Implications for Big Insurers From UnitedHealth's Q3 Results originally appeared on Fool.com.Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. 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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