Guidance for 2015
On November 19, 2015, UnitedHealth Group (UNH) updated its prior guidance for fiscal 2015. The company projected earnings of about $6 per share, lower than the original range of $6.25–$6.35 per share.
UnitedHealth Group has forecast a reduction of $425 million in its operating earnings in 4Q15, which includes advance recognition of $275 million in 2016 losses.
These losses are mainly related to the deteriorating performance of the company in the area of individual plans sold on public health insurance exchanges coupled with start-up and implementation losses expected in the Medicaid contracts.
Public exchange risks
In the introductory year of 2013, UnitedHealth Group didn’t offer plans on health insurance exchanges due to the lack of past claims data for people enrolling through these exchanges. UnitedHealth Group was concerned that this might restrict them from accurately projecting the risk profiles of patients purchasing plans on the exchange.
Additionally, the company had reservations regarding controls over participants moving in and out of the plans as well as the overall exchange regulation required for sustainable operations.
However, after 2014, similar to other health insurance companies such as Aetna (AET), Cigna (CI). and Anthem (ANTM), UnitedHealth Group also increased its participation in these exchanges. In 2014, UnitedHealth Group participated in 13 state public exchanges, and that number has increased to 24 exchanges in 2015.
Based on 2015 enrollment data, UnitedHealth Group has concluded that its overall medical care ratio has been negatively impacted due to high costs associated with health exchange enrollments.
A higher number of participants moving out of exchange plans and new participants moving into exchange plans to use medical services, lower expectations of future growth, and the failure of sponsored health cooperatives have been some additional problems associated with exchange enrollments.
The company has thus concluded that the prospects for the individual exchange segment have been poorer than projected and will continue to worsen in 2016.
Investors can reduce excessive exposure to company-specific risks related to UnitedHealth Group while benefiting from the potential upside by investing in the Health Care Select Sector SPDR ETF (XLV). UnitedHealth Group accounts for about 4.0% of XLV’s total holdings.