Healthcare costs are increasing for UnitedHealth (UNH, Financial), leading to a higher medical care ratio (MCR) in Q3 and affecting its FY24 adjusted EPS outlook. UNH's MCR rose by 290 basis points year-over-year to 85.2% in Q3. Key factors include Medicare funding reductions, effects from medical reserve development, and changes in member mix. UNH added $800 million to reserves due to potential claims from a cyberattack earlier this year.
- Despite the higher MCR, UNH exceeded earnings estimates, with a 9% year-over-year increase in Q3 earnings to $7.15 per share. Revenue also grew by 9% to $100.82 billion, surpassing analyst forecasts.
- Optum, a consistent performer for UNH, saw a 13% year-over-year revenue growth, up from 11% in Q2. Patients under value-based care are more likely to receive cancer screenings and less likely to visit the ER compared to those in fee-for-service Medicare.
- Three main factors contributed to the high patient care costs, which UNH considers temporary:
- High coding intensity in some hospital systems, increasing costs by over 20%.
- A mismatch between Medicaid members' health status and state rate updates.
- An unexpected rise in prescribing high-cost specialty medications, initially expected to be significant in 2025, now affecting 2024.
- UNH reduced its FY24 adjusted EPS outlook by $0.25 to $27.50-27.75 and anticipates a FY25 EPS upper target of around $30.00. This represents under 9% growth, below its long-term target of 13-16% and a slowdown from the expected 11% growth in FY24.
UNH shares, which recently tested all-time highs, faced a pullback due to rising costs, a guidance cut, and concerning FY25 earnings projections. This sets the stage for upcoming results from peers like Elevance Health (ELV, Financial), Molina Healthcare (MOH, Financial), Centene (CNC, Financial), and Humana (HUM, Financial).
