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UnitedHealth sees Medicare payment shortfall, shares drop

By Caroline Humer

(Reuters) - UnitedHealth Group Inc on Thursday predicted a tough year in 2014 because of government funding cuts to its private Medicare business, dragging down its shares and those of its competitors.

UnitedHealth Chief Executive Stephen Hemsley said that "underfunding" of Medicare Advantage plans for the elderly cannot be fully offset by the company's other healthcare business. UnitedHealth, the largest U.S. health insurer, has previously said that it plans to withdraw from some markets in 2014 because of these cuts.

As a result, Hemsley told investors during a call to discuss quarterly results, the company's 2014 earnings may be either lower or higher than its forecast 2013 profit, which it narrowed to $5.40 to $5.50 per share.

Sarah James, an analyst at Wedbush Securities said investors were expecting UnitedHealth profits to be flat to higher in 2014 compared with this year, "with no real downside possibility." UnitedHealth's view that 2014 profits could in fact fall was behind the drop in sector shares, she said.

Shares of UnitedHealth, which had gained 38 percent since the start of this year, fell 4.6 percent to $71.75. It is the first of the insurers to report its third-quarter results, and shares of WellPoint Inc, Aetna Inc, Cigna Corp and Humana Inc fell on the news.

UnitedHealth and other U.S. insurers are preparing for far-reaching changes in the next two years as President Barack Obama's healthcare reform law takes full effect. The company is participating in about a dozen new state insurance markets that launched on October 1 to offer subsidized health coverage.

The new state exchanges, an expansion of the Medicaid program for the poor, better care by healthcare providers at a lower cost, and changes in funding for Medicare and Medicaid could create future opportunities, Hemsley said. But, he said, 2014 and 2015 will be challenging.

MAJOR MARKET SHIFTS

UnitedHealth reported a third-quarter profit that met analyst forecasts, but investors have come to expect the company to beat such expectations.

Earnings were little changed, rising to $1.57 billion, or $1.53 per share, from $1.56 billion, or $1.50 per share, a year earlier.

UnitedHealth said revenue increased 12 percent to $30.6 billion, slightly below analysts' estimates of $30.8 billion, according to Thomson Reuters I/B/E/S.

Gail Boudreaux, who runs the company's healthcare business, said that prices for new insurance plans being sold on the state "Obamacare" exchanges vary a lot, reflecting such factors as whether an insurer offers a narrow or broad network of doctors and other providers. She expects those variations to narrow over time.

UnitedHealth said its business providing coverage for employer-sponsored health plans is also changing, as corporations have started shifting how they provide healthcare benefits. Some are experimenting with sending both retirees and active employees to private healthcare exchanges to buy their insurance.

The company said that its commercial insurance enrollment would decline in 2014 from this year because of the move among national accounts to private exchanges. It also has about 900,000 customers in the individual market who could be affected by the new public exchanges.

OPERATING COSTS RISE

UnitedHealth said it spent 80.6 percent of healthcare premiums on medical claims, a rise of 160 basis points from a year earlier, due to government cuts to payments for Medicare Advantage services.

The company also spent more because it had a larger percentage of revenue from government-paid plans, which carry lower profit margins.

"Unprecedented levels" of growth in the fee-based business of administering benefits for corporations and international growth of the benefits administration business contributed to higher operating costs, it said.

UnitedHealth said it had 45.3 million people enrolled in health plans as of September 30 and added a total of 275,000 members during the quarter, helped by increases in Medicaid and Medicare Advantage membership. Its international large-group business also expanded.

UnitedHealth said 5.7 million consumers, or nearly 20 percent of the total members in employer-sponsored or individual plans, were in high-deductible plans as of September 30.

UnitedHealth raised the low end of its 2013 earnings outlook to $5.40 a share from $5.35 while keeping the high end at $5.50. Analysts are expecting $5.51 per share. The company forecast full-year revenue of $122 billion, compared with analysts' estimates of $122.7 billion.

(Reporting by Caroline Humer; Editing by Michele Gershberg, Lisa Von Ahn and Steve Orlofsky)

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