UnitedHealth Group’s
earnings report Friday morning triggered a premarket flurry of selling in managed care stock, after the company reported higher-than-expected medical costs in the fourth quarter of 2023.
High utilization of medical services, particularly among Medicare Advantage patients, has been a persistent worry for at least six months. But the level of utilization
UnitedHealth
reported in the fourth quarter was even higher than anticipated.
UnitedHealth shares dropped 5.3% in the premarket hours, while
CVS Health
fell 3%,
Cigna
Group lost 3.7%, and
Humana
slid 6.6%.
UnitedHealth’s medical loss ratio, which tracks the proportion of premiums paid out to cover medical expenses, was 85% in the fourth quarter. Wall Street analysts had expected a notably lower MLR of 84.1%.
A higher MLR means more medical costs, and less room for profit.
“We do not think Managed Care stocks can outperform the market when MLR trends are this high,”
Mizuho
healthcare equity strategist Jared Holz wrote in a note to investors early Friday morning.
Aside from the MLR, UnitedHealth’s results for the quarter came in ahead of Wall Street’s expectations. UnitedHealth reported adjusted earnings of $6.16 a share from sales of $94.4 billion, while the consensus call among analysts tracked by FactSet was for earnings of $5.98 a share, and sales of $92.1 billion.
Revenue from UnitedHealthcare, the company’s managed care business, was $70.8 billion, with earnings from operations of $3.1 billion. Analysts had expected revenue of $67 billion, and earnings from operations of $3.4 billion.
In Optum, the company’s health services business, revenue was $59.5 billion for the quarter, better than the $57 billion consensus estimate. Earnings from operations were $4.6 billion, compared with the $4.4 billion consensus call.
In a note early Friday, Raymond James analyst John Ransom wrote that the quarter was “just OK,” and that investment income and a tax rate that came in lower than expected had contributed to the surprisingly strong profit. He said earnings per share for the quarter would have been in line with his expectations if not for the favorable tax rate.
The company had previously laid out its expectations for 2024, saying it foresees revenue between $400 billion and $403 billion, and adjusted net earnings between $27.50 and $28 per share. UnitedHealth on Friday confirmed that guidance, excluding the impact from the sale of its Brazil operations, which it announced late last year.
In a note last week, J.P. Morgan analyst Lisa Gill wrote that she would be looking for updates on Medicare Advantage utilization trends in the fourth quarter, and details on the company’s announcement in late 2023 that it would sell off its Brazil operations.
The company has scheduled an investor call for 8:45 a.m. ET on Friday.
“UNH generally sets the tone for how investors view healthcare service companies,” Gill noted.
UnitedHealth shares sharply underperformed the market in 2023, but were in line with the rest of the healthcare sector. Shares dropped 0.7% in 2023, while the S&P 500 Health Care sector index was up 0.3%. The
S&P 500
rose 24%.
UnitedHealth shares were up 8.4% over the past 12 months, and 2.1% so far in 2024.
Write to Josh Nathan-Kazis at [email protected]
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