UnitedHealth sees impact of health law; profit falls 8%

UnitedHealth Group Inc. pointed a finger at the new U.S. health law and cuts to Medicare payments on Thursday as it worked through a difficult first quarter.

The Minnetonka-based company said earnings were down 8 percent during the quarter, as it felt the full brunt of the Affordable Care Act for the first time.

Yet despite a somewhat downbeat tone from executives in a morning conference call with analysts, UnitedHealth maintained its previously stated outlook for the rest of 2014.

"The ACA impacts every major line item of our consolidated results and distorts comparisons for virtually all performance ratios," said Stephen Hemsley, UnitedHealth's CEO and president. "This will continue as the year progresses and new regulatory and tax baselines are established and settle in."

UnitedHealth Group operates the largest U.S. health insurance company. It is the first of the national for-profit insurance players to report earnings and is often seen as an industry bellwether.

Shares finished down $2.41, or 3.1 percent, to $75.78.

Stifel analyst Thomas Carroll said that while Hemsley's prepared remarks "leaned more negative than positive," it was in line with the company playbook and covered "known operational issues." The impact of the health law could have been much worse, he said.

Net income was $1.1 billion, or $1.10 a share, in the first three months of the year, about a penny above consensus. That's down from $1.2 billion, or $1.16 a share, in the same period a year ago.

Significantly for UnitedHealth, other federal reforms also cut funding for Medicare Advantage plans, privately run versions of the government's Medicare program for the elderly and disabled. UnitedHealth is the largest provider of Medicare Advantage with nearly 3 million enrollees.

Profit was reduced by 30 cents a share, executives said, due to the impact of nondeductible insurance taxes, reduced funding in Medicare Advantage programs, commercial underwriting changes and other provisions of the law.

The January-to-March period was the first in which the U.S. health law had taken full effect. The law was designed to expand health coverage to millions of people who didn't have it. But it also changed how insurers can write their coverage, no longer allowing them to refuse to cover people who are already sick.

Unlike WellPoint and some of its other competitors, UnitedHealth proceeded cautiously in the new health insurance exchanges, fearing that the online marketplaces would draw the oldest and sickest consumers, which also are the riskiest and most expensive to insure. UnitedHealth participated in just a dozen state-based marketplaces this year.

Enrollment in plans grew by 2.7 million people compared with a year ago. Much of the growth came through gains in Medi­caid, as many states took advantage of the health law's incentive to expand coverage for the poor. UnitedHealth also added enrollees through its military contract with the federal Tricare program.

Revenue was $31.7 billion, up from $30.3 billion a year ago, but missing analysts expectations of $32 billion.

Jennifer Lynch, analyst at BMO Capital Markets, said UnitedHealth's "earnings power remains intact despite these changes to the operating landscape, and that is encouraging for the balance of the year."