Story Stocks^®

Healthcare costs continue to rise for Dow component UnitedHealth (UNH -7%), pushing its medical care ratio, or MCR, considerably higher yr/yr in Q3 and clipping the high end of its FY24 adjusted EPS outlook. UNH's MCR, the percentage of premiums used in covering costs, moved 290 bps higher yr/yr in Q3 to 85.2%. The underlying factors were the newly released Centers for Medicare & Medicaid Services (CMS) Medicare funding reductions, medical reserve development effects -- UNH added $800 mln to its reserves to cover any potential uptick in claims due to a cyberattack earlier this year -- and member mix.

• Even though UNH's MCR swelled, it still managed to topple earnings estimates by double digits in Q3, expanding its bottom line by 9% yr/yr to $7.15 per share. Likewise, revenue growth edged past analyst forecasts, growing by 9% to $100.82 bln. However, UNH's relatively consistent quarterly upside made today's beats less of a pleasant surprise and more of a given.
• The highlight of Q3 was Optum, a recurring bright spot for UNH, which grew revs by 13% yr/yr, an acceleration from the +11% growth in Q2. Optum continues to enjoy a growing number of patients served under value-based care offerings. Management noted that people served by these models are more likely to receive cancer screeners and 10% less likely to visit the ER than those in fee-for-service Medicare.
• Nevertheless, increasing costs clouded the silver linings from Q3. There were three primary causes for the persistently high patient care patterns, which UNH believes are transitory.
  • The coding intensity in certain hospital systems remains high; some systems have upshifted coding intensity factors by over 20%, adding an unnecessary cost burden to the health system.
  • Further, a continuous timing mismatch exists between the current health status of Medicaid members and state rate updates.
  • Lastly, a rapid acceleration unfolded in the prescribing of high-cost specialty medications, such as those used to treat cardiovascular disease, autoimmune disorders, and cancer. UNH anticipated this would be a more meaningful issue in 2025, but some of the activity has already been pulled into 2024.
• As a result, UNH sliced $0.25 off its previous adjusted EPS outlook for FY24, now targeting $27.50-27.75. Additionally, UNH anticipates projecting the upper bound of its FY25 EPS guidance to be around $30.00. While management did reiterate its long-term earnings growth target of +13-16%, its preliminary FY25 outlook represents under +9% growth if it achieves the high end of its range, well short of its long-term forecast and a deceleration from the expected +11% jump in FY24.

With shares testing all-time highs yesterday following a roughly +17% move since last quarter, UNH was wading into priced-to-perfection territory. Even though the market likely anticipated another round of rising costs, it did not foresee such a sizeable jump, a subsequent guide-down, and troubling preliminary FY25 earnings guidance, spurring today's pullback. UNH's Q3 report now sets the tone ahead of its peers' upcoming results, including Elevance Health (ELV) on October 17, Molina Healthcare (MOH) on October 23, Centene (CNC) on October 25, and Humana (HUM) on October 30.