UnitedHealth, Humana in selloff as analysts react to cost concerns
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Managed care companies led by UnitedHealth Group (NYSE:UNH) and Humana (NYSE:HUM) came under pressure on Wednesday as Wall Street reacted to a gloomy earnings outlook the former indicated at an investor event.
At Tuesday's Goldman Sachs investor conference, UnitedHealth (UNH) projected the company's medical care cost ratio for Q2 to come under pressure amid a post-COVID recovery in outpatient medical care among seniors.
The ratio, which indicates the share of premiums spent on healthcare costs, is expected to reach the upper bound or moderately above the upper bound of its full-year outlook of 82.6%, UNH's CFO John Rex said.
UnitedHealth (UNH), the dominant player in the Medicare Advantage market and the healthcare bellwether during the earnings season, reached a new 52-week low in reaction, dragging its rivals. Humana (HUM) and Alignment Healthcare (NASDAQ:ALHC).
CVS Health (NYSE:CVS), Elevance Health (ELV), Cigna (CI) and Clover Health Investments (CLOV) were also among notable decliners, as were Medicaid players Centene Corporation (CNC) and Molina Healthcare (MOH).
Wall Street was quick to react. Barclays analyst Steve Valiquette increased the firm's forecast for UNH's medical loss ratio (MLR) by 70bps to 82.8%.
However, the analyst reaffirmed his Overweight rating as well as $565 per share target. Expecting UNH's Optum Health unit to offset the impact, he projected the company's earnings per share to slip only $0.25 to $24.70.
However, the analyst saw positives in UNH's comments for companies with large networks of outpatient ambulatory surgery centers (ASC) such as Surgery Partners (SGRY), Tenet Healthcare (THC), and to a lesser degree, HCA Healthcare (HCA).
Meanwhile, TD Cowen said UnitedHealth's (UNH) comments aligned with its findings for revenue trends among healthcare providers.
Analyst Gary Taylor noted that revenue growth in a sample of 312 for-profit hospitals it surveyed had reached ~8% YoY in May, up from ~4% and ~5% in April and Q1 2023, respectively.
"The results bode favorably for 2Q23 hospital EBITDA and will likely contribute to another quarter of "tighter" managed care MLR and quality metrics as commented on by UNH in an appearance Tuesday evening," Taylor wrote. TD Cowen reverted to HCA (HCA) as its top pick in the subsector.