UnitedHealth Delivers Earnings Beat. Why The Stock Is Dropping.

UnitedHealth shares were down 3.4% as the market opened. Managed care companies with significant Medicare Advantage businesses fell as well, with
CVS Health
dropping 2.9% and
Humana
sliding 2.5%.
Cigna
Group, which is reportedly in talks to sell its relatively small Medicare Advantage business, was down only 0.7%.

Losses had been steeper in the premarket hours, but moderated as the market opened. On a call with investors, UnitedHealth executives said that the trends pushing utilization higher in the fourth quarter had been short-term, and that the company didn’t expect the outlook for 2024 to be affected.

The company’s CFO, John
Rex,
attributed the higher-than-expected utilization in part to seniors seeking out respiratory syncytial virus vaccinations, available for the first time this past fall. Those shots generally require doctor visits.

“Sometimes those physician visits, we noted, were driving other care activity,” Rex said. “In some cases seniors that hadn’t, perhaps, visited their physician in a little while, they visited their [primary care pracitioner], got an RSV vaccine, and then in the meantime their PCPs were able to close some additional care gaps.”

Rex also said that Covid-19 hospital admissions were up in December, and that each admission was costing more on average than in the past. CEO Andrew Witty said that the company didn’t foresee any impact on its outlook for the full 2024 fiscal year.

UnitedHealth’s medical loss ratio, which tracks the proportion of premiums paid out to cover medical expenses, was 85% in the fourth quarter. Wall Street analysts had expected a notably lower MLR of 84.1%.

A higher MLR means more medical costs, and less room for profit.

“We do not think Managed Care stocks can outperform the market when MLR trends are this high,”
Mizuho
healthcare equity strategist Jared Holz wrote in a note to investors early Friday morning.

Aside from the MLR, UnitedHealth’s results for the quarter came in ahead of Wall Street’s expectations. UnitedHealth reported adjusted earnings of $6.16 a share from sales of $94.4 billion, while the consensus call among analysts tracked by FactSet was for earnings of $5.98 a share, and sales of $92.1 billion.

Revenue from UnitedHealthcare, the company’s managed care business, was $70.8 billion, with earnings from operations of $3.1 billion. Analysts had expected revenue of $67 billion, and earnings from operations of $3.4 billion.

In Optum, the company’s health services business, revenue was $59.5 billion for the quarter, better than the $57 billion consensus estimate. Earnings from operations were $4.6 billion, compared with the $4.4 billion consensus call.

In a note early Friday, Raymond James analyst John Ransom wrote that the quarter was “just OK,” and that investment income and a tax rate that came in lower than expected had contributed to the surprisingly strong profit. He said earnings per share for the quarter would have been in line with his expectations if not for the favorable tax rate.

The company had previously laid out its expectations for 2024, saying it foresees revenue between $400 billion and $403 billion, and adjusted net earnings between $27.50 and $28 per share. UnitedHealth on Friday confirmed that guidance, excluding the impact from the sale of its Brazil operations, which it announced late last year.

In a note last week, J.P. Morgan analyst Lisa Gill wrote that she would be looking for updates on Medicare Advantage utilization trends in the fourth quarter, and details on the company’s announcement in late 2023 that it would sell off its Brazil operations.

“UNH generally sets the tone for how investors view healthcare service companies,” Gill noted.

UnitedHealth shares sharply underperformed the market in 2023, but were in line with the rest of the healthcare sector. Shares dropped 0.7% in 2023, while the S&P 500 Health Care sector index was up 0.3%. The
S&P 500
rose 24%.

UnitedHealth shares were up 8.4% over the past 12 months, and 2.1% so far in 2024.

Write to Josh Nathan-Kazis at [email protected]