April 18: UnitedHealth braces for Affordable Care Act changes

Facing the most sweeping elements of the federal Affordable Care Act in 2014, UnitedHealth Group Inc. said Thursday that it is bracing for a shifting marketplace and a rash of government mandates that will put pressure on profits in the year ahead.

"While we are performing well, we are doing so in a challenging economic, regulatory and health care climate," UnitedHealth CEO Stephen Hemsley told analysts in a first-quarter earnings conference call. "The headwinds we have discussed ... remain very real."

The strongest burden will land on United's Medicare Advantage programs, which are privately run versions of the government-backed Medicare program that covers seniors and disabled people.

UnitedHealth has the largest number of Medicare Advantage enrollees, but faces competition from insurers angling to add aging baby boomers to their rolls. Meanwhile, the federal government is cutting reimbursement to doctors and other providers to try to reduce soaring spending on medical costs.

Across-the-board budget cuts, known as sequestration, are placing additional constraints on margins. UnitedHealth will absorb $250 million to $300 million over the balance of this year, company leaders said.

The company maintained its full-year earnings guidance of $5.25 to $5.50 per share, but said the hit from sequestration will keep per-share earnings in the midpoint of its forecast.

"We did not expect the fastest growing, most popular and most effective of the Medicare benefit options serving America's seniors would be underfunded to this extent in 2014 — particularly with the backdrop of the already existing ACA mandates and sequestration," Hemsley said. He added that company leaders will "take time to fairly assess" the implications and whether growth expectations for 2014 can be sustained.

UnitedHealth, the nation's largest managed care company by revenue and enrollment, is the first of the national insurance companies to report earnings, and its performance is considered an early look at how the broader industry is performing, particularly as health care reform efforts roll out.

"The quarter was high-quality," said David Heupel, senior health care analyst at Thrivent Financial. "All the things you want to see were there. But they put a shot across the bow for 2014."

Profits were helped both last year and this year because there were fewer claims than expected left over from the previous quarter. But the gain the company booked to reflect that difference was smaller this year, $280 million compared with $530 million a year earlier.

Enrollment in medical plans for the quarter grew to 42 million from 35.6 million a year ago, getting a boost from the company's acquisition of Brazilian managed care company Amil Participacoes' 200,000 new members and 2.9 million military members through a new Tricare contract that began April 1.

Revenue grew 11 percent to $30.3 billion but took a hit after one of the nation's largest fully insured companies, which UnitedHealth declined to name, decided to become self-insured. UnitedHealthcare still will collect fees for administering a plan for the 1.1 million employees, but the decision takes $2.5 billion out of the mix.

UnitedHealth's services division, Optum, remains a small slice of the revenue pie, but continues on an outsized growth pace while providing diversity and balance to the highly regulated insurance division.

"Optum is a juggernaut of performance," Heupel said, "both in the amount of growth it is adding to the top line and in margin expansion."

Earnings from operations at Optum nearly doubled and revenue of $8.4 billion represented a rise of 15 percent compared to a year ago.

"Membership beat our expectations in nearly every category," Jennifer Lynch, an analyst with BMO Capital Markets, wrote in a research note. The business is "well positioned and valuation remains attractive," she said, adding that "better-than-expected growth has largely offset the impact from the conversion and sequestration."