UnitedHealth profit off 28% as employers cut benefits

For several years, health insurers have struggled with what's known as "buy-downs," industry lingo for employers paring medical benefits that they buy for their workers as premiums go up and up.

Now, with the economy heading into a recession, buy-downs may become no-buys as companies shed jobs.

That specter hung over UnitedHealth Group's third-quarter earnings call Thursday, which was brought forward by three days to calm a jittery market.

America's biggest health insurer by revenue announced earnings that met analyst forecasts and, for the first time, broke out its investment portfolio to reassure investors it was sufficiently conservative to weather market gyrations.

However, looking ahead, chief executive Stephen Hemsley acknowledged that UnitedHealth will face significant challenges keeping members.

"Employment attrition was at what we expected and will continue and accelerate," Hemsley said.

Net earnings at the Minnetonka-based company fell 28 percent to $920 million in the quarter ending Sept. 30, compared with a year earlier, even as revenues were up 8 percent at $20.2 billion. Including capital losses on investments and adjustments for legal costs, the company reported earnings of 73 cents per share, in line with analyst forecasts.

Hemsley said he expected 2009 earnings per share between $2.90 and $3.15, about flat compared with this year.

Wall Street took comfort from the news because, well, it could have been worse.

UnitedHealth "had a low bar, and they jumped over that bar just fine," said Sheryl Skolnick, senior vice president at CRT Capital Group in Stamford, Conn. Joshua Raskin, an analyst with Barclays Capital in New York, called the results "one big sigh of relief."

UnitedHealth stock closed up 96 cents, or 4.4 percent, at $22.63. The stock had been on the same roller coaster as the rest of the market recently, falling as low as $14.51 last Friday from a 52-week high of $59.46 last December.

The real test will come next year, when UnitedHealth learns how deeply job losses will hurt its membership rolls, now at 26.47 million. The insurer said Thursday it expects to lose as many members in the first quarter of 2009 as it did in the first quarter of 2008, a period when it shed 560,000 commercial members.

Much of the loss in early 2008 came from PacifiCare members who went elsewhere because of merger problems after UnitedHealth bought the large California health plan. Hemsley has called those defections "not acceptable" and promised to re-focus efforts on local markets to recoup business.

Looking ahead, internal problems will be eclipsed by external ones. Nationally, employers cut the most jobs in five years last month, with payrolls shrinking by 159,000. Weakness in consumer confidence and the credit markets could mean more layoffs ahead. Even employees who keep their jobs may decide to drop coverage because they can't afford their share of the cost.

Shift to fee-based plans

Large employers who continue to offer defined-benefit pension plans are also seeing their investments battered, leaving less money to fund health benefits. "What that means is we are going to continue to see a shift towards fee-based plans," said Charles Haff, an analyst with Thrivent Asset Management in Minneapolis.

That's not good news for UnitedHealth and other insurers. Fee-based plans are less profitable for insurers because the employer takes on the risk.

UnitedHealth is also struggling with rising medical costs, including inpatient hospital expenses, at a time when it doesn't have much room to raise premiums. Its medical care ratio, the percentage of premiums that go toward paying medical bills, was up to 81.7 percent from 79.5 percent a year earlier.

The third-quarter numbers also showed pressure on some of the company's small but lucrative divisions that provide services rather than core insurance.

Earnings at OptumHealth, which handles disease management and banking, as well as dental, vision and other miscellaneous benefits, were down 21 percent to $175 million.

At Ingenix, its data and information technology arm, earnings were down 14 percent to $57 million, in part because pharmaceutical companies that use Ingenix to run clinical trials cut their research and development projects.

Its pharmacy benefits arm, Prescription Solutions, continued to offer a bright spot. While revenues were down as more people shifted to lower-priced generic drugs, earnings were up 18 percent to $91 million, with a big bump in the number of people served in plans not affiliated with UnitedHealth.

Chen May Yee • 612-673-7434