Medicaid Juices UnitedHealth Group Inc.'s Quarter

UnitedHealth Group today reported that third-quarter sales and earnings grew 7% year over year to $32.8 billion and $1.63 per share, respectively.

Source: UnitedHealth Group

Walking through the numbers
UnitedHealth last year took a more cautious approach to participating in the Affordable Care Act health insurance exchanges than competitor
WellPoint As a result, membership in UnitedHealth's employer and individual segment fell by 95,000 to 28.75 million people in the third quarter as ACA enrollment failed to offset employers eliminating insurance coverage for part-time employees. Declining membership led to revenue from individual and employer members falling $620 million from a year ago to $10.6 billion in the quarter.

While individual and employer sales fell, demand for Medicare plans increased. UnitedHealth Medicare Advantage plans served 25,000 more seniors in the third quarter than they did last year, resulting in Medicare and Retirement revenue rising 4% to $11.5 billion. The insurer also reported that enrollment in its supplemental Medicare and Medicare Part D plans grew, with UnitedHealth adding 50,000 more supplemental Medicare members and 5,000 more Part D members during the third quarter alone.

Although Medicare results were solid, UnitedHealth's Medicaid business was its best performer. With 26 states implementing Medicaid expansion under the Affordable Care Act ahead of the third quarter, the number of people served by UnitedHealth's Medicaid plans increased 965,000 from a year ago, resulting in community and state segment sales jumping 34% year over year to $6.1 billion.

UnitedHealth;s international business brought in sales of $1.8 billion in the quarter, up 19% from last year. Meanwhile, higher demand for integrated healthcare solutions, data analytics, and prescription drug services drove up sales at the company's Optum health services unit by 21% year over year, to $12 billion in the third quarter. Optum's operating margin also improved to 7.2%, up from 6.9% a year ago.

Dropping to the bottom line
UnitedHealth continues to digest rising costs associated with administration and fees tied to the Affordable Care Act. Those fees reduced after-tax margin by 80 basis points, resulting in net margin of 4.9% in the quarter, down 20 basis points from 5.1% last year. 

UnitedHealth did see improvement in member medical costs, which helped offset some of the company's ACA headwinds. The company's medical care ratio, or the amount of premium dollars spent on member healthcare, totaled 79.7% in the third quarter, down from 81.6% in the second quarter and 80.6% from last year.

Rising membership revenue continues to provide significant cash flow: UnitedHealth expects its full-year operating cash flow will hit $8 billion in 2014.

UnitedHealth is returning that cash to investors through both dividends and share buybacks. During the third quarter, UnitedHealth's dividend payout to shareholders grew by 29% year over year to $1 billion. UnitedHealth has also bought back $3 billion in shares through the first three quarters as part of its plan to repurchase 100 million shares, or 10% of all of its shares outstanding. Despite that spending, the company's cash and short-term investments remain at roughly $9.2 billion, essentially unchanged in the past year.

Looking forward
In its third-quarter results, UnitedHealth maintained its guidance for sales of $130 billion for this year, but increased its earnings per share forecast to between $5.60 and $5.65 for 2014, up from its second-quarter guidance for EPS of $5.50 to $5.60.

UnitedHealth plans to participate in far more states during the ACA's second enrollment period, which begins in mid-November and ends in the middle of February. That suggests exchange membership next year might stabilize the company's individual and employer enrollment. UnitedHealth membership trends will also be supported by Medicaid enrollment as additional states adopt expansion of the program, as well as from ongoing Medicare plan demand tied to the aging of America.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned.The Motley Fool recommends UnitedHealth Group and 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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