UnitedHealth Group's earnings report Friday morning sparked a flurry of premarket selling in managed care stocks after the company reported higher-than-expected medical costs in the fourth quarter of 2023.
High healthcare utilization, particularly among Medicare Advantage patients, has been an ongoing problem for at least six months. But the occupancy rate UnitedHealth reported in the fourth quarter was even higher than expected.
Shares of UnitedHealth fell 5.3% in the premarket hours, while CVS Health fell 3%, Cigna Group fell 3.7% and Humana fell 6.6%.
UnitedHealth's medical loss ratio, which measures the proportion of premiums paid out to cover medical costs, was 85% in the fourth quarter. Wall Street analysts had expected a significantly lower MLR of 84.1%.
A higher MLR means higher medical costs and less room for profit.
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“We do not believe managed care stocks can outperform the market when MLR trends are this high,” Jared Holz, healthcare equity strategist at Mizuho, wrote in a note to investors early Friday morning.
Aside from the MLR, UnitedHealth's quarterly results came in above Wall Street's expectations. UnitedHealth reported adjusted earnings of $6.16 per share on revenue of $94.4 billion, while analysts tracked by FactSet reported a consensus of earnings of $5.98 per share and revenue of $92.1 billion forecast.
Sales at UnitedHealthcare, the company's managed care business, were $70.8 billion and operating income was $3.1 billion. Analysts had expected revenue of $67 billion and operating profit of $3.4 billion.
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At Optum, the company's health services business, revenue was $59.5 billion in the quarter, above the consensus estimate of $57 billion. Operating profit was $4.6 billion, compared to the consensus estimate of $4.4 billion.
In a note early Friday, Raymond James analyst John Ransom wrote that the quarter was “just fine” and that capital gains and a lower-than-expected tax rate contributed to the higher-than-expected 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 expected revenue between $400 billion and $403 billion and adjusted net income between $27.50 and $28 per share. UnitedHealth confirmed that forecast Friday, excluding the impact of the sale of its Brazil operations announced late last year.
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In a note last week, JP Morgan analyst Lisa Gill wrote that she would look for updates on fourth-quarter Medicare Advantage usage trends and details on the company's announcement in late 2023 that it is selling its Brazil operations become.
The company has scheduled an investor conference call for Friday at 8:45 a.m. ET.
“UNH generally sets the tone for how investors view health services companies,” noted Gill.
UnitedHealth shares significantly underperformed the market in 2023, but were in line with the rest of the healthcare sector. Stocks fell 0.7% in 2023, while the S&P 500 healthcare sector index rose 0.3%. The S&P 500
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increased by 24%.
Shares of UnitedHealth are up 8.4% over the past 12 months and up 2.1% so far in 2024.
Write to Josh Nathan-Kazis at [email protected]