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Medicare cuts weigh on UnitedHealth

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(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.

Earnings rise

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.

Medicare cuts

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.

UnitedHealth is the biggest private provider of Medicare plans. Humana, the No. 2 provider, said in a regulatory filing last week that it expects Advantage rates to be cut 6 percent to 7 percent this year, deeper than the 4 percent to 5 percent it had initially expected. Humana said it was evaluating its earnings projections as a result.

UnitedHealth today reported fourth-quarter net income climbed to $1.43 billion, or $1.41 a share, matching analysts’ estimates. Revenue increased 8.2 percent to $31.1 billion, the insurer said in a statement.

Higher earnings haven’t always translated into stock gains for the company. In October, UnitedHealth also reported increased earnings and maintained its profit outlook. The shares tumbled 5.1 percent, as analysts said the results had left investors underwhelmed.

2014 forecast

UnitedHealth reaffirmed its 2014 earnings forecast of $5.40 to $5.60 a share, compared with $5.50 a share for last year. At an investor conference last month, the company said it expects after-tax earnings in its insurance division to fall by $1.1 billion this year under the health law.

WellPoint, based in Indianapolis, is due to report earnings Jan. 29.

UnitedHealth has limited sales on the insurance exchanges set up under Obamacare. Instead, it’s been buoyed by growth in government and employer-backed insurance plans as well as Optum, its technology and consulting unit for hospitals, employers and other clients.

Optum’s earnings from operations surged 43 percent in the quarter, dwarfing gains from the larger benefits business. The technology unit gained attention last year after it was hired as a general contractor to help fix the software problems plaguing, the federal Obamacare exchange.

“We have long predicted that the power of Optum to transform health-care processes and services both within United and externally would become the growth driver,” said Sheryl Skolnick, an analyst at Stamford, Connecticut-based CRT Capital Group, in a note to clients. “This quarter and year confirms and bolsters that view.”

–Editors: Bruce Rule, Andrew Pollack

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