By When UnitedHealth Group releases its earnings report on Friday, investors will be eagerly watching for signs of stability following recent concerns about high utilization and costs in the Medicare Advantage business. The market was rattled last month when UnitedHealth’s CFO, John Rex, suggested that there was pent-up and delayed demand in the Medicare Advantage sector.
Medicare Advantage, the privately managed alternative to traditional Medicare, has gained popularity among seniors and proven to be highly profitable for insurers like UnitedHealth. In response to the attractive government payments for insuring Americans over 65, many companies have jumped into the Medicare Advantage market.
The impact of increased spending on Medicare Advantage care during this quarter will directly affect UnitedHealth’s earnings. The initial comments made by CFO John Rex on June 14 led to a significant 6.4% decline in UnitedHealth Group’s shares. Other managed care companies, including Humana, also experienced notable drops, with an 11.2% decrease in share value on the same day.
Since the unsettling remarks, several analysts have revised their earnings estimates for UnitedHealth in the second quarter. According to the FactSet analyst consensus estimate, UnitedHealth is expected to report earnings of $6.01 per share and sales of $90.7 billion for the quarter.
UnitedHealth’s Medicare Advantage Earnings to Impact Company
UnitedHealth’s lower Medicare Advantage earnings may have far-reaching effects within the company. One area that could be affected is Optum Health, which employs physicians responsible for caring for Medicare Advantage patients. Some of these physicians have arrangements with Optum where they receive a lump-sum payment for each patient, rather than payment for each service provided. The increase in healthcare utilization may have a negative impact on Optum, as well as the insurance division of UnitedHealth.
The financial consequences of this situation are reflected in UnitedHealth’s stock performance. Shares have dropped by 15.6% this year and experienced a 2.4% decrease on Wednesday, likely due to concerns about the upcoming earnings report.
Despite the potential challenges that lie ahead, Raymond James analyst John Ransom believes that any weaknesses in UnitedHealth’s earnings will be offset by share repurchases, cost reductions, or other strategic measures that the company can employ to support its results. However, Ransom notes that this approach may not be sufficient for generating increased price-to-earnings (P/E) ratios.
UnitedHealth is scheduled to release its earnings report before market opening on Friday. Additionally, an investor call has been scheduled for 8:45 a.m. Eastern Time on the same day. According to FactSet, UnitedHealth shares are currently trading at a P/E ratio of 17.5 for the next 12 months. In comparison, Humana’s valuation stands at 14.5 times earnings projected over the next year.
This year, UnitedHealth shares have underperformed both the broader market and the healthcare sector as a whole. The Health Care Select Sector SPDR Fund (XLV) has experienced a 4.5% decline, while the S&P 500 has seen a notable increase of 17.5%.
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