UnitedHealth gains greeted with shrug

UnitedHealth Group Inc. reported better-than-expected third-quarter earnings Thursday, with growth in its Medicare, Medicaid and information-technology businesses offsetting lower enrollment in employer-sponsored plans.

But the market's verdict was ho-hum. UnitedHealth stock was up briefly in pre-trading but fell after the market opened, closing 50 cents lower at $48.10.

"It's decent," said David Heupel, a portfolio manager at Thrivent Asset Management in Minneapolis. "The take-away is [that] it's somewhat more of the same."

As the first big insurer to report earnings, Minnetonka-based UnitedHealth is seen as a bellwether for the industry.

The challenge for many insurers is finding organic growth in a job market where employers aren't hiring much, which means members aren't being added to insurers' rolls. UnitedHealth predicted higher earnings next year.

Some of that earnings growth will come from share buybacks and a merger.

UnitedHealth's earnings from operations for the quarter ended Sept. 30 were $2.16 billion, up 16 percent from the same period a year earlier. That translated to earnings per share of 95 cents, higher than analysts' consensus estimate of 92 cents.

Revenue was up 4 percent at $18.68 billion.

The company's closely watched medical care ratio improved to 81.6 percent from 82 percent in the previous quarter. The ratio shows the percentage of premium revenue used to pay patient bills and is a key indicator of how well UnitedHealth is keeping medical costs in check.

The company expects full-year earnings of between $3.48 and $3.50 per share.

Fourth quarter results are expected to be slightly lower than the third quarter's because of seasonal factors and higher marketing expenditures for Medicare Advantage plans. The enrollment season just opened for next year's plans, which are co-branded with the AARP.

UnitedHealth expects 2008 earnings of $3.95 to $4 per share, which would include contributions from the newly purchased Sierra Health Services Inc., based in Las Vegas.

Share buyback planned

The growth in earnings per share will be partly buoyed by the company's purchase of about $7 billion worth of its own shares in the fourth quarter of 2007 and through 2008.

Stephen Hemsley, who took over as chief executive a year ago after William McGuire was ousted in a stock-option scandal, took pains to address concerns over the past.

"This quarter, we have done what we told you we would do," Hemsley said. "Our prediction for 2008 is a return to balanced growth."

The company has ironed out integration wrinkles with PacifiCare, a big California health plan that UnitedHealth bought last year, he said, adding that claims and other financial dealings were accurate for more than 99 percent of cases this year.

Hemsley also referred to a temporary suspension of Medicare Advantage plans this summer across the industry, prompted by complaints of deceptive marketing and bad customer service. Medicare Advantage is an umbrella plan that combines traditional hospital and physician coverage with a drug benefit.

"We enter 2008 with Medicare Advantage much better positioned for growth than last year," he said. "Certified brokers are better trained and [the company has] better direct oversight of their day-to-day efforts."

Chen May Yee • 612-673-7434

3rd quarter FY2007, 9/30

2007 2006 % chg.

Revenue $18,679.0 $17,970.0 +3.9

Income* 1,283.0 1,112.0 +15.4

Earn/share 0.95 0.80 +18.8

9 months

Revenue $56,726.0 $53,414.0 +6.2

Income* 3,438.0 2,984.0 +15.2

Earn/share 2.50 2.13 +17.4

Figures in millions except for earnings per share.

*Results for the nine months ended Sept. 30 include $87 million of operating costs ($55 million after-tax, or 4 cents per share) for the settlement of Internal Revenue Code Section 409A surtax liabilities on behalf of non-officer employees who exercised certain options in 2006 and 2007, and $89 million of non-cash operating costs ($57 million after-tax, or 4 cents per share) for the modification charge because of repricing unexercised options subject to IRS Section 409A.

Chen May Yee • mychen@startribune.com