UnitedHealth crushes 1Q estimates post Obamacare dump; first to jettison social conscience now taking leadership role

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The News:

UnitedHealth Group Inc. (Minnetonka MN) posted stronger-than-expected earnings Tuesday (April 18, 2017) in the first quarter without the vast majority of its Affordable Care Act-compatible individual health-insurance business.

@UnitedHealthGRP posted stronger-than-expected earnings in the 1st quarter Click To Tweet

The insurance giant earned $2.37 a share, beating the $2.17 expected by analysts. It also generated $48.7 billion in revenue, higher than the $48.3 billion that analysts were predicting.

UnitedHealth also raised its guidance for both profit and revenue for the year. The insurer now sees full-year EPS of $9.65 to $9.85 a share, higher than the expected $9.51 a share.

This was the first quarter in which UnitedHealth rolled back most of its plans from the exchanges established by the ACA, the healthcare law better known as Obamacare. The company said the rollback slowed revenue growth and the number of lives covered.

“UnitedHealth Inc.’s withdrawal from ACA Individual markets, combined with the 2017 health insurance tax deferral, reduced consolidated first quarter 2017 revenues by approximately $1.6 billion and lowered the revenue growth rate by 4.1%,” the release from UnitedHealth said.

The company also said it dropped 765,000 people through the ACA market, partially offsetting the addition of 1.5 million customers through other lines of business.

Steve’s Take:

Even the CEO of the US’s largest health insurer by number of people covered has no more insight into the chaotic healthcare fight than anyone else, he told analysts during the insurer’s first-quarter earnings call.

“It’s probably not often we say this but if you really have actually been following the media with respect to healthcare policy, I would say the media has been very accurate with respect to the narrative that is going on there,” UnitedHealth CEO Stephen Hemsley said.

Hemsley also said UnitedHealth executives previously “engaged” with lawmakers about the details of the plan, but the American Health Care Act went through constant upheaval during its short lifespan, Business Insider points out.

The AHCA underwent rapid transitions over its month-long existence, as leaders added provisions to try and make it more popular with conservative Republicans. In fact, at one point during the White House’s attempt to revive the AHCA after the initial vote’s failure, it appeared that the moderate and conservative sides of the House GOP conference were told two different things by Vice President Mike Pence, and no one was sure what was actually being proposed.

Meanwhile, UnitedHealth has been expanding in Medicare, where it offers private health plans for the elderly, and in Medicaid, where it helps states manage low-income individuals. Those businesses have proven to be more lucrative than Obamacare’s individual market, where UnitedHealth broadly retreated after offering plans on the health law’s exchanges in 34 states last year, according to Bloomberg.

The decision has also helped shield UnitedHealth somewhat from the indecision in Washington about the future of the ACA’s individual coverage. For instance, President Donald Trump last week threatened to cut off subsidies that help insurance companies pay the medical bills of patients who buy coverage on public exchanges.

While rivals like Aetna and Humana scale back their ACA coverage for 2018, UnitedHealth has largely turned the page. UnitedHealth now offers coverage on the ACA’s public exchanges only in Virginia, Nevada and New York.

Looking ahead, the trends in UnitedHealth’s government business will help boost profits. The Minnesota-based company predicted that earnings for the full year, excluding some items, will be an eye-popping $9.65 to $9.85 a share. That’s well above the $9.51 projected by analysts, according to an average of estimates compiled by Bloomberg, and above the company’s January forecast.

UnitedHealth has also benefited from the entanglement of its major rivals in two massive deals. Humana and Aetna, the No. 2 and No. 3 sellers of private Medicare plans, in February ended their long effort to combine, after the transaction was blocked by a federal judge. Anthem and Cigna are embroiled in several legal challenges tied to their merger attempt, and a key ruling could come this week.

Health insurers are also getting a boost from a one-year pause of a tax on the industry under the Affordable Care Act. UnitedHealth said the tax holiday pushed the company’s rate down to 30%, and that it expects the full-year rate now to be 32.5%.

Bottom Line:

After taking substantial losses, UnitedHealth generated significant controversy and some outright criticism by saying last year that it would pull back from its Obamacare offerings. Coming into Tuesday’s (April 18, 2017) first-quarter financial report, UnitedHealth investors were hoping that the strategy would prove itself out, leading to better earnings even if it resulted in a slowdown in top-line growth.

Sure enough, UnitedHealth’s results were stronger than most had expected, vindicating the decision the company made with respect to dumping the ACA business. Moreover, the insurer increased its expectations for the full 2017 year.

One thing many investors might well miss is the extent to which favorable underwriting is helping UnitedHealth, Motley Fool points out. The insurer said its medical cost reserves developed favorably during the first quarter by a margin of $450 million. That’s even larger than the $360 million it saw in the year-earlier period. UnitedHealth’s medical cost ratio did climb, thanks largely to the ACA-related decision as well as a moratorium on health insurance taxes.

Going forward, even though the federal government has thus far failed in its efforts to repeal the Affordable Care Act and replace it with some other form of healthcare legislation, UnitedHealth’s actions appear to have put it in the best possible position both in the current health insurance environment and in what might be looming down the road.

Two words come to mind when I think UnitedHealth: “Prescient” and “quick-thinking.” Okay, that’s three words, and they usually go together, but not always.

Steve's Take: @UnitedHealthGRP is in the best possible position given the state of #Obamacare Click To Tweet

Even if Obamacare comes roaring back, UnitedHealth isn’t barred from re-entering the exchanges it’s abandoned. And I’d bet it has even planned for that possibility, to be on the safe (smart) side.

All things considered, UnitedHealth has bested its competition in foreseeing the future operating environment most suited to its brand of continued growth and profitability. If you’re looking to add a major health insurer to your portfolio, at the moment UnitedHealth has the most attractive upside and least forbidding downside.