Shares of UnitedHealth Group Inc. tumbled Monday after fellow insurer Humana Inc. missed first-quarter earnings expectations and said some costs climbed in its Medicare Advantage business.
THE SPARK: Humana, based in Louisville, Ky., said Monday that its first-quarter earnings fell 21 in a performance that missed Wall Street expectations.
Humana said membership in its Medicare Advantage plans grew in the quarter, but it also increased its investment in the plans, and many of those costs were borne in the first quarter.
THE BIG PICTURE: Medicare Advantage plans are privately run versions of the government's Medicare insurance program for the elderly and disabled. Subsidized by the government, the plans offer basic Medicare coverage topped with extras like vision or dental coverage.
UnitedHealth, based in Minnetonka, Minn., is the largest provider of Medicare Advantage plans and Humana is the second largest.
THE ANALYSIS: Humana said some of its Medicare Advantage costs climbed because it was preparing for minimum medical-loss ratios that will start in 2014 due to the health care overhaul. These ratios measure the percentage of premiums an insurer spends on care or quality improvement, and insurers will be required to meet certain minimums or return the difference to consumers and employers.
Morningstar analyst Matthew Coffina said this likely affected the shares of other Medicare Advantage providers because investors will expect them to make similar adjustments that raise costs and squeeze profit margins.
However, Wedbush analyst Sarah James said she thinks Humana's increased costs were specific to that company and the first quarter. Even so, she said shares of UnitedHealth are likely down "in sympathy" with Humana stock because UnitedHealth has such a large Medicare Advantage business.
SHARE ACTION: UnitedHealth shares fell $1.92, or 3.3 percent to $55.99 in afternoon trading, while broader trading indexes were down slightly. Humana shares, in contrast, sank $7.65, or 8.7 percent, to $80.17.