UnitedHealth Group Inc on Tuesday reported a better-than-expected quarterly profit that also cleared the decks for growth this year as it booked anticipated 2016 losses on its individual exchange business.
"2016 is off to a strong start, considerably stronger than 2015," Chief Executive Officer Stephen Hemsley said during a conference call with investors.
UnitedHealth is the first health insurer to announce fourth-quarter financial results, and its shares rose more than 3 percent in morning trading. Competitors Aetna Inc and Anthem Inc also rose, gaining 1.3 percent and 0.7 percent respectively.
In November, UnitedHealth warned it was losing money on the individual exchanges that were created under U.S. President Barack Obama's 2010 healthcare reform law. It said it plans to evaluate in the first half of this year "to what extent, if any" it will offer "Obamacare" plans in 2017.
Aetna and Anthem have also said they are not making money on the individual exchanges, but have committed to staying in them.
UnitedHealth said it booked $245 million of losses in the fourth quarter on its individual exchanges business, for a total of $720 million in losses booked in 2015. It also set aside $95 million in reserves to help cover anticipated losses on a new Medicaid contract in Iowa. It sees adjusted 2016 net earnings of $7.60 to $7.80 per share, versus $6.45 in 2015.
"They have absorbed all these losses up front on the exchanges and on Medicaid," said Ana Gupte, an analyst at Leerink Partners. In fact, they may not experience as much of a loss, she explained, which could provide room for upside.
UnitedHealth said its medical care ratio, or the percentage of premiums paid out for medical services, rose to 82.7 in the fourth quarter from 80.1 percent in the fourth quarter of 2014, mostly due to costs from individual plans.
Analysts had expected a ratio of 83 percent or higher.
Revenue in the company's Optum business, which includes healthcare technology and management as well as pharmacy benefits, rose 70 percent to $21.9 billion. It bought pharmacy benefit manager Catamaran earlier in the year.
Net profit fell to $1.22 billion, or $1.26 per share, from $1.51 billion, or $1.55 per share, a year earlier.
Excluding items, UnitedHealth earned $1.40 per share, compared with the average analyst estimate of $1.38 per share according Thomson Reuters I/B/E/S.
Revenue rose 30 percent to $43.60 billion, above the average analyst estimate of $43.23 billion.
(Reporting by Caroline Humer in New York and Amrutha Penumudi in Bengaluru; Editing by Saumyadeb Chakrabarty and Paul Simao)