UnitedHealth Group Inc. is living in two worlds. In one, profit is good. In the other, it's bad.
Those worlds collided Tuesday during a conference call with Wall Street analysts in which the nation's largest health insurer by revenue reported first-quarter earnings that surpassed market expectations.
Net income was up 21 percent to $1.19 billion, or $1.03 per share, for the three months ended March 31. Revenue was up 5 percent to $23.19 billion.
UnitedHealth also raised its guidance and now expects 2010 profit of $3.15 to $3.35 per share, up from the $2.90 to $3.10 per share earlier projected.
Among the reasons for the robust performance: UnitedHealth Group gained new members in its Medicare and Medicaid businesses, and overall medical costs turned out lower than expected.
In a typical year, these would all be good things. But this isn't a typical year.
UnitedHealth is the first health insurer to report earnings since Congress passed its health system overhaul, which aims to expand coverage to 32 million Americans but also includes provisions that could limit insurer profits. The coming months are crucial for the industry as the law gets translated into regulations that will kick in this fall.
"The quarter was outstanding, there's no better way to put it," said David Heupel, a portfolio manager with Thrivent Asset Management in Minneapolis. Perhaps too good in the eyes of regulators?
"If you ever want to pour gas on the flame, United maybe just did," he said.
As if to underscore the threat the company could face from doing too well, its stock fell 25 cents to end the day at $30.98 a share.
With unemployment still high, UnitedHealth's commercial enrollment fell 4 percent to 24.5 million members. But its public businesses did well, with Medicare and Medicaid enrollment up 11 percent to 7.8 million.
The insurer also reported strong growth in its small but profitable technology, disease management and pharmacy management units.
"We performed strongly in the first quarter in virtually all of our businesses," President and Chief Executive Stephen Hemsley told analysts.
The group's overall medical cost ratio, or MCR -- the portion of premiums spent on medical care -- was 81.3 percent for the quarter, down 1.1 percentage points from a year ago.
That ratio, long a source of pride within the firm, could soon be a problem.
Starting in 2011, insurers will have to meet minimum MCRs of 80 percent in the individual and small group markets and 85 percent in the large-group market. Most insurers are close to complying for the group markets but fall short in the individual segment.
Last week, a report from the Senate Commerce Committee put UnitedHealth's 2009 MCR at 70.5 percent in the individual market and 81.1 percent for small groups, on the low end of the six giant insurers listed. UnitedHealth's large-group MCR was 83.3 percent.
The report speculated that insurers will shift certain expenses such as nurse hotlines and wellness programs from the administrative to medical column to boost their MCR.
UnitedHealth spokesman Don Nathan denied that speculation Tuesday. Nurse hotlines and disease management programs are generally not included in the group's consolidated MCR, with exceptions for certain health plans, Nathan said, adding that the practice won't change.
'Sensitive time'
UnitedHealth has been busy rolling out reform-themed initiatives.
Last week, it launched a new diabetes management program in which it will pay lifestyle coaches at the YMCA and pharmacists at Walgreens to help people prevent diabetes. It also issued a report suggesting that better technology and care coordination could shave $370 billion in costs over 10 years from Medicaid.
If the insurer is focused on reform, and how it will fare, so were analysts on Tuesday's call.
"This is a sensitive time for the industry," said Carl McDonald of Oppenheimer & Co. "The law has passed and the rules are not yet written. How concerned are you that higher guidance is going to reignite some of the negative sentiment against insurers and result in tougher implementation of the new regulations?"
Hemsley sounded slightly taken aback at having to defend good news.
"They are what they are. That's how we have to report," he replied.
"Those are the same kinds of things we think this administration also has an appetite for in trying to advance and modernize the health system," he said. "Our interests are actually quite aligned on those levels."
Chen May Yee • 612-673-7434
