UnitedHealth Surges on Obamacare Withdrawal

By Dan Caplinger Markets Fool.com

The Affordable Care Act transformed the health insurance industry, and UnitedHealth Group (NYSE: UNH) has had a particularly tumultuous experience with the health insurance exchanges that followed. After taking substantial losses, UnitedHealth generated controversy by saying last year that it would pull back from its Obamacare offerings. Coming into Tuesday's first-quarter financial report, UnitedHealth investors were hoping that the strategy would prove itself out, leading to better earnings even if it resulted in a slowdown in top-line growth.

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UnitedHealth's results were stronger than most had expected, confirming the decision the company made with respect to the ACA. Moreover, the insurer increased its expectations for the full 2017 year. Let's take a closer look at UnitedHealth to see how it did and what's ahead for the health insurance giant going forward.

Image source: UnitedHealth Group.

UnitedHealth starts 2017 strong

UnitedHealth's first-quarter results were quite good. Revenue climbed 9% to $48.7 billion, which was a bit faster than the growth rate most investors were expecting. Net income rose by more than a third to $2.19 billion, and the resulting adjusted earnings of $2.37 per share easily topped the consensus forecast for $2.17 per share on UnitedHealth's bottom line.

Taking a closer look at the insurer's financials, the strength of UnitedHealth's core insurance unit once again stood out. The UnitedHealthcare division saw 12% top-line growth to $40.1 billion, with the company boasting a 2.5 million increase in the number of members it serves in the employer, Medicare, Medicaid, and international benefit segments. However, UnitedHealth's withdrawal from Obamacare offerings led to a 900,000 drop in customers of individual insurance products. Operating earnings for the segment climbed 15%, and UnitedHealth credited stronger margins for much of the gain. The sharpest gains for the segment came from the Medicare & retirement and community & state business units.

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Of some concern for long-term investors, though, was the ongoing slowdown for the Optum health services unit. Revenue did manage to accelerate from last quarter's near-flat performance, with first-quarter gains amounting to almost 8%. The OptumHealth and OptumInsight businesses managed to give UnitedHealth double-digit sales gains, but the OptumRx pharmacy benefit management service saw just a 5% top-line rise.

UnitedHealth CEO Stephen Hemsley put the results in a broader context. "Our focus on quality and consistency in everything we do for those we serve across the health system continues to strengthen our business each quarter," Hemsley said, and "these efforts are driving consistent growth and strong bottom-line performance across our businesses."

Can UnitedHealth keep ahead of healthcare reform?

One thing many investors might well miss is the extent to which favorable underwriting is helping UnitedHealth. The insurer said its medical cost reserves developed favorably during the first quarter by a margin of $450 million. That's even larger than the $360 million it saw in the year-earlier period. UnitedHealth's medical cost ratio did climb, thanks largely to the ACA-related decision as well as a moratorium on health insurance taxes.

UnitedHealth also raised its guidance for 2017, giving investors another reason to celebrate. The health insurer now believes its revenue will crack the $200 billion mark, up between $1 billion and $3 billion from its previous guidance range. New calls for adjusted earnings of $9.65 to $9.85 per share are between $0.25 and $0.35 per share higher than UnitedHealth expected just a quarter ago. Cash flow of approximately $12 billion should help the company look at moves to boost return of capital to shareholders, perhaps through an ongoing rise in UnitedHealth's dividend.

UnitedHealth shareholders seemed quite pleased with the positive outlook the health insurer provided, and the stock climbed 2% in pre-market trading following the announcement. Going forward, even though the federal government has thus far failed in its efforts to repeal the Affordable Care Act and replace it with some other form of healthcare legislation, UnitedHealth's actions appear to have put it in the best possible position both in the current health insurance environment and in what might be looming down the road.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.