(Reuters) - UnitedHealth Group Inc said on Thursday implementing Obamacare and private Medicare funding cuts will eat into 2014 profit but the government-paid insurance business will drive growth as more people sign up.
UnitedHealth, the largest U.S. health insurer, reported fourth-quarter profit a beat higher than analyst expectations, but its shares and those of major competitors fell anyway as investors focused on costs.
“It’s rare that United stock doesn’t go down on earnings day,” said Sheryl Skolnick, an analyst for CRT Capital. “I think what the Street did see was that the medical cost ratio was a bit higher than folks thought.”
The company said the medical cost ratio, which reflects the percentage of premiums paid out in claims to cover customer procedures and doctor visits, was “well controlled” and within expectations. It rose 1.1 percentage points in the quarter compared with a year earlier to 81.5 percent.
UnitedHealth shares fell 2.5 percent to $73.05 while WellPoint, Aetna, Cigna and Humana also fell.
UnitedHealth said that funding cuts for private Medicare would negatively effect 2014 and that it was still in discussions with the government on the 2015 funding levels. The Centers for Medicare and Medicaid Services is due to announce a proposed funding rate in February.
“They’ve done their best to offset them, but there’s pressures on their book, particularly in Medicare,” Leerink Swann analyst Ana Gupte said.
The fourth quarter marked the beginning of sales of new individual plans created under the national healthcare reform law often called Obamacare, coverage which went into effect for the first customers on January 1.
UnitedHealth has limited its participation in selling those new plans so far to three states and provided few details about how it was going.
“We will continue to closely study the development of the individual public exchanges in 2014 and will be selective in our approaches for 2015,” Chief Executive Officer Stephen Hemsley said during a conference call.
Strong growth for the company will come from expansion of Medicaid under healthcare reform law, growth in traditional Medicaid as more people sign up, and the development of programs for people eligible for both Medicare and Medicaid, he said.
The technology for HealthCare.gov, the federal website that sells plans to individuals in 36 states, has had many problems and negatively affected enrollment. The other 14 states run their own websites and some have also had issues.
UnitedHealth said it held onto more small business and individual customers during the fourth quarter than usual because it had extended some existing small group plans that were due to expire into 2014 rather than canceling them.
The Patient Protection and Affordable Care Act requires that plans that do not meet the law’s benefit requirements be cancelled. President Barack Obama has asked insurers to extend those to give people more time to sign up because of technology problems and as Americans complained the new plans were too costly compared with previous coverage.
UnitedHealth said fourth-quarter net income rose to $1.4 billion, or $1.41 per share, from $1.2 billion, or $1.20 per share, a year earlier.
The insurer is the first to report its results in a group that also includes WellPoint Inc and Aetna Inc. Employer-based plans and government health programs, as well as a fast-growing health technology division, make up the bulk of UnitedHealth’s annual sales.
UnitedHealth also added new members in its government plans for seniors and for the poor, for a total of 45,445,000 medical customers at the end of 2013.
The company said that revenue rose to $31.12 billion, up from $28.77 billion a year earlier.
Both earnings and revenue came in slightly ahead of analyst expectations, which were for earnings of $1.40 per and revenue of $31.07 billion, according to ThomsonReuters I/B/E/S.
United Health said it continues to expect revenue of $128 billion to $129 billion and earnings of $5.40 to $5.60 per share in 2014.
The company’s private Medicare business, which provides managed care plans to seniors, experienced government funding cuts that decreased its profitability, UnitedHealth said.
It was helped, however, by an overall lower medical spending trend as fewer customers checked into hospital, reducing expenditure on reimbursing providers.
UnitedHealth said that profit improved in its technology business, which includes the QSSI unit that has been working on fixing problems with the federal website for new health insurance for individuals called HealthCare.gov. Optum, which includes many other health technology related businesses, had earnings from operations of $2.3 billion, up from $875 million a year earlier.
Reporting by Caroline Humer; Editing by Rosalind Russell