Health Insurance

UnitedHealth's earnings: Three things to watch

UnitedHealth Group
Dawn Villella | Bloomberg News | Getty Images

Traditionally, UnitedHealth Group's earnings sets the tone for the rest of the health care sector, but this year the nation's largest insurer's quarterly report could be even more of a bellwether than usual.

United has threatened to walk away from Obamacare exchanges, after losing more then $700 million on individual Affordable Care Act plans last year. Now, investors and health officials alike want to know whether the insurer will make good on that threat.

Analysts expect United to post profits of $1.72 per share for its first quarter, down from an estimate of $1.78 per share at the beginning of the year, according to Factset. On the top line, analysts are looking for revenue of $44.3 million, up more than 20 percent from the first quarter a year ago.

Beyond the numbers, there are three things to watch for when United reports on Tuesday morning:

Medical spending trends

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Part of the reason United said it was looking to exit the Obamacare market was that its exchange plan members tended to incur higher medical costs—making the plans unprofitable. One big question is whether those negative trends continued in the first quarter.

Investors will also watch to see whether overall medical spending growth remained within expectations for United's Medicare, Medicaid and commercial insurance plans. Those make up the majority of its insurance business.

This winter saw a relatively mild flu season. That should bode well for United and other health insurers when it comes to seasonal medical costs. On the flip side, high-priced specialty drugs continue to pose a challenge for all health care payers.

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The extent of the company's withdrawal from the exchange markets will likely be the key focus during the earnings conference call.

Rate submissions for 2017 plans are due May 11 for the states on the federal exchange. United offered plans in 36 states this year. So far, the company has confirmed it will exit three markets: Arkansas and Georgia, where it saw sharp losses in 2015, and Michigan.

"I think all the insurance companies deep down think there's a future in [the] direct to consumer market. I don't they want to leave, unless they feel that they have to," said Katherine Hempstead, senior director at the non-profit Robert Wood Johnson Foundation.

Yet Hempstead said it was not surprising United was giving up on the Georgia market. In order to compete, she said the insurer priced below competitors, attracting patients who were sicker and thus racked up higher health costs.

"They had a lot of hospitalizations, above the median, and it just looked like their enrollment was very chaotic," Hempstead said, as a number of members dropped coverage part way through the year.

"If you look at who else is in the market… you can imagine [United] thinking, 'there's not a good future here'," she added.

Leerink analyst Ana Gupte said United's withdrawal from state exchanges could benefit its rivals in their efforts to gain regulatory approval for their respective mergers. That list includes Aetna, Humana, Anthem and Cigna.

"We expect these exits place the Obama Administration in a position where they particularly need Aetna and Anthem to play in these markets," Gupte wrote in a recent note to clients.

Already, a number of state regulators have given their approval of the deals on condition that Anthem and Aetna to maintain or in some cases expand their Obamacare exchange plan offerings.

"We see this as potentially acting as a positive influence on deal close to make it viable for these companies to subsidize these losses as a public service to consumers through the synergies generated by the proposed acquisitions," wrote Gupte.

When Humana Beats Rivals Gain

UnitedHealth usually reports about a week ahead of its large-cap peers, setting the tone for the sector. Yet its shares don't necessarily lead when it comes to gains following its report.

According to data from CNBC analytics partner Kensho, UnitedHealth Group has topped analyst earnings estimates 35 times over the past 10 years. About half of those times the stock has averaged a gain of nearly 0.5 percent in the week following its earnings.

Its large-cap peers, Aetna and Anthem, are generally flat in the same time period. But according to Kensho analytics, shares of two of United's smaller rivals tend to outperform in the week after the nation's largest insurer reports.

If you'd bought Wellcare the day before United's earnings and sold one week later, on average the stock has gained almost 1.5 percent. If you'd bought shares of Centene, you would have gained nearly 4 percent.

UnitedHealth will report before the bell on April 19. Its investor conference call is scheduled to begin at 8:45 a.m. ET.