UnitedHealth Group’s first-quarter net income slid 8 per cent as funding cuts to a key product and costs imposed by the health care overhaul dented the health insurer’s performance.
The Minnetonka, Minn., company said Thursday the overhaul and government budget cuts added about 35 cents per share in costs during the quarter. The federal law aims to provide coverage for millions of uninsured people, but it also trims funding for Medicare Advantage plans, changes how insurers can write their coverage and adds an industry-wide tax, which is not deductible.
UnitedHealth shares fell deeper than the broader market in late-morning trading after it announced first-quarter results, but the overhaul hit didn’t surprise many investors. UnitedHealth said in December it expects the federal law to reduce its after-tax operating earnings by $1.1 billion in 2014.
What may have rattled Wall Street a bit was the insurer’s report that it saw intense price competition in several markets, including New York, where it has a lot of business. The insurer said some competitors there are pricing their coverage below the costs they will incur to attract customers, and that could hurt enrolment more than UnitedHealth anticipated.
The insurer also said a spike in hepatitis C drug use, driven by the expensive new treatment Sovaldi, added $100 million to medical costs in the quarter. Regulators approved Sovaldi, from Gilead Sciences Inc., last December. The drug is seen as a breakthrough treatment, but its $1,000-a-pill price tag has drawn some skepticism from care providers as well as insurers.
“We’re working diligently to ensure this medication is applied under critically appropriate standards,” UnitedHealth CEO Stephen Hemsley told analysts during a conference call.
Overall, UnitedHealth earned $1.1 billion, or $1.10 per share, in the three months that ended March 31. That’s down from $1.19 billion, or $1.16 per share, a year earlier. Revenue rose nearly 5 per cent to $31.71 billion.
Analysts expected earnings of $1.09 per share on $32.01 billion in revenue, according to FactSet.
The insurer said its Medicare Advantage business was hurt by both the overhaul and the mandatory across-the-board federal budget cuts known as sequestration.
Medicare Advantage plans are privately run versions of the government’s Medicare program for the elderly and disabled people, and UnitedHealth is the nation’s largest provider of this coverage, with nearly 3 million enrollees. It said lower funding forced it to trim benefits and doctor networks this year and leave some markets.
UnitedHealth on Thursday also reaffirmed a 2014 earnings forecast that it announced last December. The insurer still expects earnings to range from $5.40 to $5.60 per share, while analysts expect, on average, $5.60 per share.
Company shares slid 2.8 per cent, or $2.20, to $75.99 in late-morning trading, while the Dow Jones industrial average slid slightly. UnitedHealth is a Dow Jones component.
After soaring nearly 39 per cent last year, UnitedHealth shares have reverted to more measured growth so far in 2014, with the stock climbing about 4 per cent as of Wednesday’s close.
UnitedHealth Group Inc. is the first insurer to report earnings every quarter. Many see it as a bellwether for other insurers.