(Bloomberg) — UnitedHealth Group Inc. (NYSE:UNH), the biggest U.S. health insurer, said government cuts to Medicare may make it harder to increase earnings in 2015, sending shares down the most in three months.
Rate cuts that may reach 7 percent, following a similar reduction for this year, could be “extraordinarily disruptive” to the program, Chief Executive Officer Stephen Hemsley told analysts on a conference call today.
Medicare Advantage, insurers’ private version of the U.S. government program for the elderly, has been a key source of growth for the industry and provided about a fifth of UnitedHealth’s profit last year. The companies’ reimbursements are being scaled back to help pay for the insurance expansion under the Patient Protection and Affordable Care Act (PPACA).
Insurers are facing “unprecedented uncertainty from the ACA implementation and the 2014 Medicare Advantage rate cuts,” said Brian Wright, a New York-based analyst at Monness Crespi Hardt & Co., in an e-mail.
UnitedHealth fell 3.4 percent to $72.30 at 11:20 a.m. EST. The Minnetonka, Minnesota-based insurer earlier slipped 3.6 percent for its biggest intraday decline since October. WellPoint Inc., the second-largest U.S. insurer, dropped 2 percent, Aetna Inc. declined 1.5 percent and Humana Inc. fell 1.1 percent.
Investors drove the stocks down even after UnitedHealth said fourth-quarter earnings rose 15 percent, boosted by growth in its Optum technology business as well as enrollment gains. The company also reaffirmed its 2014 forecast.
Hemsley told analysts the company will “focus on delivering earnings-per-share growth” in 2015 while saying results will depend in part on Medicare Advantage payments. The U.S. Centers for Medicare and Medicaid Services is due to propose its preliminary rates next month, with a final decision expected in April.
Hemsley also said it’s unclear how quickly insurers may be able to collect higher premiums to recoup new taxes imposed by PPACA.
For investors, “the key topic” will be how the cuts may affect profit next year, said Carl McDonald, a Citigroup analyst based in New York. “The industry is lobbying to mitigate those cuts, but it would be useful to understand the 2015 impact if the cuts are implemented as proposed,” he wrote in a note to clients.
PPACA is set to reduce Medicare payments to insurers by an estimated $145 billion over a decade. Democrats led by President Obama said the companies were being overpaid for care that the government provides for lower cost on its own. Insurers said they provide extra benefits, such as lower copays and prescription eye glasses, in their plans.