UnitedHealth Group’s unit for health care services drove better-than-expected fourth-quarter earnings overall for the company, but the nation’s largest health insurer on Tuesday also increased projected losses on new government-run health insurance exchanges.
Only a small fraction of the 42.3 million Americans covered by Minnetonka-based UnitedHealth Group buys insurance through the exchanges, which were launched under the federal Affordable Care Act.
Yet surprisingly high costs for those enrollees have generated $720 million worth of actual and expected losses for 2015 and 2016, the company reported Tuesday.
Overall, UnitedHealthcare’s insurance business was still profitable during the fourth quarter, although less so than during the year-ago period, according to the financial results released Tuesday. Meanwhile, earnings were up 50 percent at the Optum services division, which provides everything from direct care to management of pharmacy benefits.
“We know the individual exchanges are top of mind to you,” said Stephen Hemsley, the UnitedHealth Group chief executive, during a conference call with investors. “The balance of our total business — the well more than $175 billion of it — is thriving, considerably stronger and better positioned than this time last year.”
UnitedHealth Group made headlines last year for saying it might pull out of the exchanges for 2017 because of unsustainable losses. Other large national insurers have reported losses, too, while expressing commitments to the new marketplaces.
Getting insurers to compete on the exchanges is key to the success of the health law, which requires almost all Americans to have health insurance and provides tax credits through the new exchanges as a way for uninsured people to get covered.
A lack of competition would mean fewer choices for shoppers, but also could boost prices and prompt the government to pump more subsidies into the market.
During a conference call Tuesday, UnitedHealthcare Chief Financial Officer Dan Schumacher said the company increased its loss expectations for the exchange business in 2016.
UnitedHealth Group ended 2015 with about 500,000 enrollees on the exchanges, a number that is growing to about 700,000 enrollees this year. With more members, the company will lose more money, Schumacher said.
UnitedHealthcare has taken steps to block growth in the market by withdrawing products, increasing prices and cutting both marketing and commissions to insurance agents. In addition, the company has “intensified clinical engagement and medical management with this membership group and reduced operating costs as appropriate,” said David Wichmann, chief financial officer for UnitedHealth Group.
“By mid-2016 we will determine to what extent, if any, we will continue to offer products in the exchange market in 2017,” Wichmann said during the conference call.
In 2015, UnitedHealthcare lost $720 million in the individual exchange-compliant insurance business, including $245 million recorded in the fourth quarter of 2015 for the advance recognition of 2016 losses.
Overall, earnings for the fourth quarter of $1.25 billion were down from $1.51 billion during the fourth quarter of 2014. On a per-share basis, however, adjusted earnings of $1.40 beat by 2 cents the earnings-per-share estimates of analysts surveyed by Thomson Reuters.
Revenue of $43.6 billion for the quarter beat analysts’ estimates, and was well beyond sales in the year-ago quarter of $33.4 billion.
During 2015, UnitedHealth Group closed on its purchase of Catamaran, an Illinois-based company that dramatically expanded Optum’s pharmaceutical benefit management business. Optum earnings during the quarter were up 50 percent compared with the year-ago quarter, due to the pharmacy business growth as well as growth in its network of health care clinics and urgent care centers.
“A big part of the growth in OptumHealth was attributed to growth in provider revenues,” wrote Sheryl Skolnick, an analyst with Mizuho Securities USA, in a note to investors Tuesday.
Thomas Carroll, an analyst with Stifel, wrote in a note to investors that Optum accounts for about 50 percent of consolidated revenue for the quarter and 60 percent of consolidated earnings. Carroll added: “We expect Optum contribution to climb and drive higher valuation multiples for [UnitedHealth Group] over time.”
UnitedHealth Group shares closed at $122.58 Tuesday, up $3.31 for the day, or 3 percent.