Shares of UnitedHealth Group Inc. slumped Friday, reversing an earlier gain, after the health insurer reported earnings that beat expectations and raised its full-year outlook but expressed concern over the “unintended consequences” of changes to Medicare Advantage rates.
The stock UNH, -2.74% dropped 2.5% in afternoon trading to pull back from a three-and-a-half-month closing high in the previous session. The $13.22 price decline, which was the biggest among the Dow Jones Industrial Average’s DJIA, -0.42% decliners, shaved about 87 points off the Dow’s price, while the Dow fell 179 points, or 0.5%.
The company reported before the opening bell first-quarter net income that increased to $5.61 billion, or $5.95 a share, from $5.03 billion, or $5.27 a share, in the same period a year ago.
Excluding nonrecurring items, adjusted earnings per share of $6.26 topped the FactSet consensus of $6.16.
Revenue grew 14.7% to $91.93 billion, well above the FactSet consensus of $89.7 billion, as UnitedHealthcare revenue rose 12.6% and Optum revenue increased 24.9%.
Total people served increased by 1.93 million people, or 3.8%, to 52.89 million. That included a 6.2% rise in community and senior people served, to 20.25 million, which also included 9.5% growth in Medicare Advantage, to 7.55 million people.
Medical care ratio (MCR), or medical costs as a percentage of premium revenue, rose to 82.2% from 82% last year but was below the FactSet consensus of 82.5%. The lower the MCR, the more profitable the insurer.
The stock initially rose as much as 2% in premarket trading soon after the results were released and was up as much as 0.2% minutes after the opening bell, before turning lower.
Mizuho analyst Ann Hynes reiterated her buy rating on the stock, saying she viewed the company’s operating trends as “good.” However, she said the stock was under pressure due to a drop in days in claims payable (DCP) and commentary on second-quarter seasonality.
The company reported DCP of 47.8, down from 49.1 a year ago and from 49.9 in the sequential fourth quarter. And operating cost ratio increased to 14.8% from 14.2% a year ago, which Hynes said was above expectations of 14.7%.
On the post-earnings conference call with analysts, Chief Executive Officer Andrew Witty said the company was “working through” the implications for Medicare Advantage rates for 2024, as the proposals from the Centers for Medicare and Medicaid Services (CMS) were lower than expected.
“While we remain concerned about some of the potential unintended consequences of the changes of the risk adjustment model, particularly around adequate diagnosis and support for people with diabetes, complex behavioral needs, and more, we do appreciate CMS’s decision to phase in the changes,” Witty said on the call with analysts, according to an AlphaSense transcript.
Also on the conference call, Mizuho’s Hynes said the company commented on seasonality and increased investment because of the acquisition of Change Healthcare, which was completed in October 2022.
Chief Financial Officer John Rex said on the call that he expects integration and investment activities will “accelerate into the second quarter.”
That said, the company raised its adjusted EPS guidance range to $24.50 to $25 from $24.40 to $24.90, citing the strength of first-quarter results. The FactSet consensus for 2023 EPS was $24.93.
UnitedHealth’s stock has lost 3.2% year to date, while the Health Care Select Sector SPDR exchange-traded fund XLV, -0.80% has declined 1% and the Dow has gained 2.1%.
