ELV - UnitedHealth drags managed care after comments on medical costs

2023-06-14 07:18:14 ET

UnitedHealth Group ( NYSE: UNH ) and other managed care players are among notable underperformers in the pre-market trading Wednesday in a move attributed to comments made by the company's CFO, John Rex, regarding the trajectory of the company's healthcare costs.

During UnitedHealth's ( UNH ) presentation at Tuesday's Goldman Sachs investor conference, Rex projected that UNH's medical care ratio, the share of premiums spent on healthcare costs, will come under pressure in Q2 2023.

Rex expects UNH's medical care cost ratio for Q2 will reach the upper bound or moderately above the upper bound of its full-year outlook of 82.6%.

UnitedHealth ( UNH ) and Humana ( NYSE: HUM ), leading players in the Medicare Advantage market, have dipped ~5% in the pre-market extending post-market losses after the comments.

Shares of Alignment Healthcare ( ALHC ) and Clover Health ( CLOV ) are also in the red alongside notable Medicaid insurers such as Elevance Health ( ELV ), Centene Corporation ( CNC ), and Molina Healthcare ( MOH ). Pharmacy chain CVS Health ( CVS ) which operates health insurer Aetna, has lost ~3%.

"I would expect that this distance that the full year would probably settle in the upper half of the existing range so that we set-up," CFO Rex added.

According to FactSet, Wall Street projects UnitedHealth ( UNH ) to report a medical cost ratio of 82.6% for Q2 compared to 82.2% in Q1 2023 and 82.0% in 2022.

UNH's chief executive for Medicare and retirement Tim Noel said that the company is seeing a normalization in medical activity after COVID concerns kept seniors away from in-person care during the pandemic.

"We're seeing as behaviors kind of normalize across the country in a lot of different ways and mask mandates are dropped, especially in physician offices, we're seeing that more seniors are just more comfortable accessing services for things that they might have pushed off a bit like knees and hips," Noel added.

In reaction to UnitedHealth's ( UNH ) comments, Barclays analyst Steve Valiquette raised the firm's MLR forecast for the company by 70bps to 82.8% but only lowered earnings projection by only $0.25 to $24.70 per share, expecting UNH's Optum Health unit to offset the impact.

Valiquette, who reiterated the Overweight rating and $565 per share target on the stock, expects managed care space to react negatively at the market open in light of the UNH's updates.

However, "UNH should benefit from these higher utilization trends in its Optum Health segment, particularly in the company's ambulatory surgery center (ASC) franchise, as well as other parts of Optum Care," he added.

The analyst also sees positive readthrough to companies with sizable outpatient ASC franchises, such as Surgery Partners ( NASDAQ: SGRY ), Tenet Healthcare ( NYSE: THC ), and to a lesser extent HCA Healthcare ( HCA ).

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