UnitedHealth Group's first-quarter earnings sank 14 percent, as medical costs dulled enrollment-fueled revenue gains for the nation's largest health insurer, which also expects federal budget cuts will pressure its performance the rest of the year.
Shares of the Minnetonka, Minn., company dropped almost 6 percent in morning trading Thursday.
UnitedHealth said it still backs a forecast it made last November for 2013 earnings to range between $5.25 and $5.50 per share, but the automatic federal budget cuts, which will hit the government's Medicare program for the elderly and disabled people, will make the top end of that range harder to reach.
UnitedHealth is the largest provider of Medicare Advantage plans, which are subsidized, privately run versions of the government's Medicare program for the elderly and disabled people.
Analysts had labeled UnitedHealth's 2013 earnings forecast conservative after it came out last fall, and the insurer normally raises it several times through the year, but so far it has just backed the initial projection. The insurer said last fall it expected growth this year, but it anticipated challenges from high unemployment and costs tied to the health care overhaul, which imposes fees and coverage restrictions on insurers.
The overhaul also is expected to bring new business to the industry when it expands coverage to millions of people largely starting next year. But investors are still wary about how the law will ultimately affect insurers.
UnitedHealth also said Thursday it expects less revenue in 2013 because a very large client switched its insurance to a self-funded approach, where it pays the claims and the insurer just administers the policy. These plans bring in less revenue for insurers. UnitedHealth now expects revenue of about $122 billion, compared to its previous projection for $123 billion to $124 billion.
For the full year, analysts expect earnings of $5.51 per share on $123.83 billion in revenue.
In the first quarter, UnitedHealth earned $1.19 billion, or $1.16 per share. That figure doesn't count a portion of earnings that went to shareholders of Amil Participacoes SA, a Brazilian health benefits and care provider that UnitedHealth is in the process of buying for about $4.9 billion.
The performance was down from $1.39 billion, or $1.31 per share, a year ago. Revenue rose 11 percent to $30.34 billion in the three months that ended March 31.
Analysts expected earnings of $1.14 per share on $30.54 billion in revenue.
Much of the earnings drop can be tied to an accounting adjustment UnitedHealth made due to leftover insurance claims.
The insurer booked a $280 million gain in the quarter because claims left over from previous quarters came in lower than expected, which allowed it to release money held in reserve. That compares to a $530 million gain in last year's quarter. The lower total means actual claims came in closer to what the insurer projected.
The insurer's enrollment soared 18 percent compared to last year's quarter and topped 42 million people, as it gained more than 4 million customers from the Amil deal and also saw growth in several other categories.
But medical costs, which are by far UnitedHealth's largest expense, climbed 13 percent to $22.57 billion in the quarter.
UnitedHealth shares dropped $3.53, or 5.7 percent, to $58.50 in early morning trading. They have traded in a 52-wek range of $50.32 to $63.95.
UnitedHealth is the first major U.S. health insurer to announce earnings every quarter. Many analysts and investors see it as a bellwether for the managed care sector.
WellPoint Inc., the nation's second-largest insurer, reports earnings April 24, and Aetna Inc. follows on April 30.
Health insurance is UnitedHealth's largest business, but it also operates segments that sell information technology services and pharmacy benefits management.