UnitedHealth raises profit outlook

  • Article by: JACKIE CROSBY , Star Tribune
  • Updated: July 19, 2012 - 9:42 PM

Earnings rose 5.5 percent as Medicare enrollment soared 18 percent. But investors balked, and stock fell.

UnitedHealth Group Inc. reported higher profits, growing revenue and a bullish outlook for the year ahead, so naturally the company's stock fell 2.4 percent during trading Thursday.

"Welcome to the earnings season fun," said David Heupel, an analyst for Thrivent Financial.

The nation's largest U.S. health insurer raised its earnings outlook for the second time this year after profits increased 5.5 percent in the second quarter. But UnitedHealth's stock tumbled along with other managed care companies, including WellPoint, Aetna and Cigna.

"The results compared to the reactions are a little odd," Heupel said.

Rising enrollment, especially in government-backed programs, helped fuel UnitedHealth's strong performance, the company said. Membership rolls grew by 1.7 million during the year, including an 18 percent boost in Medicare, which covers seniors.

Despite the growth, CEO Stephen Hemsley told analysts that profit margins are being squeezed, particularly in its government plans, as states try to rein in budgets. "There continues to be more downward pressure than upward pressure," said Hemsley, noting a lingering "employment malaise" and more regulatory demands from the federal government.

Even as Hemsley laid out potential downsides for UnitedHealth, the Minnetonka-based company raised profit expectations. Annual revenue is now expected to reach $110 billion, or $4.90 to $5 a share, topping the previous earnings forecast of $4.80 to $4.95 a share in April.

Analyst Jason Gurda of Leerink Swan in New York described the quarter as "relatively unsurprising given the company's recent performance."

Medical costs, the amount insurers pay out to cover patient care, continues to remain flat and strengthen the company's margins. While the number of patient visits and procedures are starting to rise, UnitedHealth said most people are using outpatient services and putting off more intensive services that come with higher out-of-pocket costs.

The company's Optum health services division, based in Eden Prairie, remains a small overall percentage of revenue, but continues to report steady growth. Revenue for the company, which includes wellness plans, pharmacy benefits management and health information technology services, increased 4 percent to $7.3 billion.

The market for health services is "just beginning to ripen," Hemsley said. "Optum is an early-stage enterprise relative to scale we believe will ultimately develop in this sector."

Now that the U.S. Supreme Court has upheld the bulk of the Affordable Care Act, which requires all Americans to buy insurance or pay a penalty, UnitedHealth stands to gain millions of new customers in the coming years. The law is expected to extend health coverage to roughly 30 million uninsured Americans by expanding Medicaid coverage for low-income citizens and setting up exchanges to help individuals and small businesses shop for insurance coverage.

Hemsley said implementation of the health exchanges by 2014 will be "challenging, given the time frames we have left" and predicts that businesses will move slowly to the exchanges in the beginning.

UnitedHealth's stock has slumped since the high-court's ruling, and its strong profit forecast didn't immediately quell investors' unease.

UnitedHealth is considered a bellwether of the industry, particularly under new health care regulations, because it is the first to report earnings. At the close of trading Thursday, the company's stock had fallen to $54.99.

Heupel said UnitedHealth's stock routinely gets beaten up on earnings day because investors are worried about cost pressures. Still, he said, the company's position in the market appears strong through 2013.

"It's hard not to look ahead and say this is a pretty good story shaping up for the foreseeable future."

Jackie Crosby • 612-673-7335

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