Lower government payments for private Medicare services and prescriptions for older people dragged down UnitedHealth Group Inc's (UNH.N) first-quarter profits, the company said on Thursday.
Chief Executive Officer Stephen Hemsley also warned during a conference call that planned cuts to payments for Medicare Advantage would be one of its most significant challenges in 2014 and that the company may pull out of some markets.
The largest U.S. health insurer has been coping with changes to the insurance industry for several years related to the Affordable Care Act, which sets profit margins for companies and outlines mandatory coverage requirements. In 2014, it will begin paying new insurance premium taxes and start selling insurance on health exchanges.
The government regularly tries to cut payments, or reimbursements, to healthcare companies as part of its drive to lower spending on healthcare. Lab testing company Quest Diagnostics Inc (DGX.N) on Wednesday missed analyst expectations, saying it had been hurt by reimbursement pressure.
The U.S. government recently outlined its payment policy for insurers who sell private Medicare plans to older people [ID:nL2N0CO1PW] and while not as big a cut as it had first proposed, Hemsley said the decline was still more than they expected.
"We will take the time to fairly assess the implications to our 2014 UnitedHealth Group growth outlook - and whether our growth expectations for 2014 can be sustained in light of the continuation of both sequestration and a significantly greater rate setback than anyone could have expected," Hemsley said on a conference call.
He said the company may pull out of some markets for this product.
UnitedHealth's shares were down 3.8 percent at $59.66 on Thursday afternoon on the New York Stock Exchange. Shares of smaller competitor Humana Inc (HUM.N) were down 2.7 percent at $72.51.
The company said first-quarter net profit was $1.2 billion, or $1.16 per share, down from $1.4 billion, or $1.31 per share a year earlier.
Analysts on average had been expecting earnings of $1.14 per share, according to Thomson Reuters I/B/E/S.
Investors may have been surprised that the company did not beat earnings by more given that some hospital groups have reported low use of services this quarter, which typically benefits insurers, said Chris Rigg, an analyst at Susquehanna Financial Group. Hospital groups HCA Holdings Inc (HCA.N) and Health Management Associates Inc HMA.N both warned that admissions were weak in the first quarter.
"The data points we've gotten from the providers would have suggested a larger beat in the quarter," Rigg said.
The company also lowered its 2013 revenue expectation by $2.5 billion to $122 billion because a major public-sector customer had switched out of a full-risk plan to a self-funded insurance plan. In the latter, the customer pays for its employee healthcare and UnitedHealth administers the plan. UnitedHealth, which provides these services to many large companies, receives lower revenue in that fee-based business.
The switch comes as employers and insurance providers brace for the next wave of implementation of the Affordable Care Act.
"There is an adverse incentive in the Affordable Care Act to move from full-risk insurance to a service, self-insurance type model," Jefferies & Co analyst David Windley said. Moving to a self-funded plan can enable employers to avoid the new insurance premium tax next year, he said.
For 2013, UnitedHealth said it still expected earnings of $5.25 to $5.50 per share, but the government sequestration would affect the top end of the range. Analysts are expecting earnings of $5.52 per share in 2013. Under sequestration, Medicare program receive an automatic 2 percent cut in government reimbursement.
Revenue rose to $30.3 billion from $27.3 billion a year ago, helped by membership growth. The company added 1.1 million new members during the quarter to total 86 million as of March 31.
The company said that 5.6 million consumers were in its consumer-directed health-care products in the first quarter, up 18 percent year over year. In those plans consumers pay directly for a larger share of medical costs.
(Reporting by Caroline Humer in New York; editing by Lisa Von Ahn, Maureen Bavdek and Matthew Lewis)