All eyes were on UnitedHealth’s medical costs when the health insurance giant reported second-quarter financial results on Friday, but rising outpatient utilization among seniors that spooked investors left the payer’s earnings largely unscathed.
UnitedHealth’s medical loss ratio — the share of premiums spent on healthcare costs — was 83.2% in the quarter, higher than the 81.5% notched in the second quarter last year but lower than analyst expectations.
“In the second quarter, outpatient care activity among seniors was a few hundred basis points above our expectations,” UnitedHealth CFO John Rex said on a Friday morning call with investors. “Specific orthopedic and cardiac procedures have increased far above that level of variation.”
Rising costs did hurt margins. UnitedHealth’s net margin dropped to 5.9%, from 6.3% in the second quarter of 2022. The company’s operating cost ratio in the quarter was 14.9%, compared to 14.6% same time last year.
However, it could have been worse, as higher medical spend didn’t really affect earnings in the quarter, analysts commented. UnitedHealth’s stock rose 7% in morning trade Friday following the results.
“We expect [UnitedHealth] to recover some of its recent losses today. Based on conversations, we think investors feared worse than the 83.2% MLR. Despite the higher MA medical costs, [earnings] was basically inline with expectations prior to the June warnings,” Jefferies analyst David Windley wrote in a note on the results.
UnitedHealth first flagged higher-than-expected outpatient utilization in June, warning that its MLR might hit or even exceed prior guidance in the second quarter. Humana also disclosed similar concerns. Investment banks cited the trend as one driver behind a number of managed care downgrades heading into the earnings season.
UnitedHealth said it’s keeping a close eye on trends that might indicate more severe disease progression in areas like cancer and cardiovascular disease, which would translate into higher costs. But “we see no such evidence,” Rex said.
The payer, which expects the heightened care activity to persist throughout the year, factored the trend into its Medicare Advantage plan bids for 2024, filed earlier this summer.
“We’re confident that next year we will once gain grow at a pace exceeding that of the broader market,” CEO Andrew Witty told investors.
Overall, UnitedHealth reported revenue of $92.9 billion in the quarter, representing 16% growth and above Wall Street expectations.
The Minnetonka, Minnesota-based company brought in $5.7 billion in profit, up 8% year over year.
Health services business Optum brought in revenue of $56.3 billion, up 25% year over year. Its value-based care unit Optum Health added another 200,000 lives to fully-capitated arrangements, bringing total patients to more than 4 million, the company noted on its earnings call.
Management said on the call that UnitedHealth is seeing increased demand for behavioral health services, benefiting Optum Health. Analysts commented that the unit’s margins degraded from the first quarter to the second quarter, a trend Witty chalked up to early investments in the care needs of new and complex members that should result in eventual savings.
“We’re going to continue to lean into that growth very assertively,” Witty said.
Its payer arm, UnitedHealthcare, reported revenue of $70.2 billion, representing 13% growth.
Along with MA uncertainty, payers are also facing volatility due to the Medicaid redeterminations process, as states resume eligibility checks that were paused during COVID-19.
UnitedHealth is working to support states as they initiate redeterminations, and investing in outreach to help individuals retain coverage, management said. However, the process isn’t far along enough to have a sense of how it’ll affect UnitedHealth’s rolls, and whether the payer will be able to recapture members who have lost Medicaid coverage in other plan offerings.
“It is still early,” Rex said.
