(Bloomberg) — UnitedHealth Group Inc. (NYSE:UNH), the biggest U.S. health insurer, said it will drop out of all but a “handful” of state exchanges where it sells individual Patient Protection and Affordable Care Act (PPACA) plans, acting on concerns it raised last year that the government program that has brought coverage to millions isn’t profitable enough.
Chief Executive Officer Stephen Hemsley said Tuesday that the company next year “will remain in only a handful of states.” The exchange market is proving to be smaller and riskier than UnitedHealth had expected, meaning “we cannot broadly serve it on an effective and sustained basis.” The company expects to lose about $650 million on the plans this year.
Hemsley spoke on a conference call as part of the company’s release of first-quarter results, which topped analysts’ profit estimates in part thanks to UnitedHealth’s consulting, technology and services unit, Optum.
The PPACA exchange system, President Barack Obama’s signature domestic policy achievement, is projected to cover about 12 million people this year, according to the Congressional Budget Office, helping many afford private insurance using tax subsidies. It has proven volatile for health insurers selling coverage in the new markets, known as exchanges, with some reporting losses.
UnitedHealth already plans to withdraw from at least five states for 2017 after selling coverage in 34 states for 2016. The company said in December that it should have stayed out of the individual exchange market longer. UnitedHealth had about 795,000 customers of Obamacare’s exchanges as of March 31, and expects that number to fall to about 650,000 by December.
Earlier Tuesday, UnitedHealth posted first-quarter profit that beat analysts’ estimates as results from its Optum business helped overcome losses on its PPACA exchange plans.
Earnings were $1.81 a share, excluding some items, UnitedHealth said in a statement, exceeding the $1.72 average of 24 analysts’ estimates compiled by Bloomberg. Changes to how the company accounts for taxes on stock-based compensation boosted adjusted earnings by 6 cents a share, UnitedHealth said.
“Consistent organic growth, strong operating discipline and solid execution generated a strong quarter with a little upside,” Sheryl Skolnick, an analyst at Mizuho Securities USA, said in a research note. “This is a really strong, solid way to start the year.”
The shares gained 1.8 percent to $130.07 at 9:31 a.m. in New York trading.
Net income rose 14 percent to $1.61 billion, or $1.67 a share, on revenue of $44.5 billion. Optum posted operating profit of $1.1 billion, up from $742 million a year earlier. fueled by the expansion of the pharmacy-benefits business with the acquisition of Catamaran Corp. in July. The company raised its 2016 adjusted earnings forecast to a range of $7.75 to $7.95 a share on annual revenue of $182 billion. Analysts had estimated adjusted earnings of $7.73 on average. The change was driven by taxes and accounting items.
UnitedHealth is the first health insurer to report results for the first three months of 2016. Analysts and investors will scrutinize the report for signs of how the entire health-care industry is faring. UnitedHealth, based in Minnetonka, Minnesota, said it spent about 82 cents on medical costs for every premium dollar it took in during the first quarter. The company’s medical membership climbed to 47.7 million people on March 31 from 46.4 million in the last quarter on 2015.
Optum includes units that help doctors and hospitals analyze data and treat and bill patients. It also aids employers with health benefits, runs clinics and has a pharmacy-benefits business.
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