UnitedHealth Falls Most in 8 Months After Profit Drops

UnitedHealth Group Inc., the biggest U.S. health insurer, fell the most in over three months after the company said lower reimbursements from the government’s Medicare program may hurt earnings in 2014.

UnitedHealth, the biggest private provider of Medicare benefits, declined 3.8 percent to $59.69 at 4 p.m. New York time. Humana Inc., the second-largest Medicare insurer, fell 3.1 percent to $72.21.

Medicare reimbursements may fall about 4 percent next year after the U.S. government dropped plans for a steeper decline, UnitedHealth Chief Executive Officer Stephen Hemsley told analysts today on a conference call. Federal budget cuts have left the program “significantly underfunded” and forced UnitedHealth to reassess its outlook, he said.

“We did not expect the fastest growing, most popular and most effective of the Medicare benefit options serving America’s seniors would be underfunded to this extent in 2014,” he said.

Carriers have become increasingly reliant on Medicare as an aging U.S. population swells the program’s ranks. Medicare Advantage, the private version of the government benefits, accounted for 28 percent of earnings at Minnetonka, Minnesota-based UnitedHealth last year, Carl McDonald, a Citigroup analyst, said today in a note to clients. They accounted for 58 percent of profit at Louisville, Kentucky-based Humana.

Insurers Fall

Medicare carriers including Health Net Inc. and WellCare Health Plans Inc. also fell on UnitedHealth’s warnings, said Jennifer Lynch, a BMO Capital Markets analyst in New York.

UnitedHealth “has scale and the tools that help them manage costs,” she said in a telephone interview. “If they believe they’re going to have trouble with the program in ’14, that is going to be true for the others as well.”

Insurer shares have surged since April 1, when the Obama administration softened a proposed cut to one rate used to set Medicare Advantage payments. Hemsley said companies will still see a loss when other factors are taken into account, including a new tax to help pay for covering the uninsured. At the same time, costs for treating Medicare patients are expected to rise about 3 percent, he said.

The company may reduce the benefits it offers or pull back in some markets as a result, he said.

Isabella Leung, a spokeswoman for the Centers for Medicare and Medicaid Services, which sets the reimbursement rates, didn’t return a call seeking comment.

Advantage Plans

About 13.1 million people are enrolled in Medicare Advantage plans, about a quarter of Medicare’s beneficiaries. The plans offer extra benefits such as lower out-of-pocket costs and eyeglasses. President Barack Obama’s Affordable Care Act cut about $136 billion in funding for the private plans, after complaints the government was overpaying insurers.

UnitedHealth also said that first-quarter net income dropped 14 percent to $1.19 billion, or $1.16 a share, as higher Medicare costs helped offset a surge in enrollment. The company reaffirmed its 2013 earnings outlook of $5.25 a share to $5.50 a share.

While maintaining the forecast, the company also said in a statement that sequestration, the package of federal budget cuts that took effect last month, “pressures the top end of that range.”

First-quarter per-share earnings beat by 2 cents the average of 21 analysts’ estimates compiled by Bloomberg. Revenue rose 11 percent to $30.3 billion.

Total membership in UnitedHealth’s medical plans jumped 18 percent to 42 million people, helped by Medicare gains as well as the $4.9 billion purchase last year of Amil Participacoes SA, Brazil’s largest health insurer.

“Medicare is the principal headwind on 2014,” Hemsley said on the call. “The rest of it, I think we are trying to make clear that our businesses are very strong and our growth is very strong.”

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