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UnitedHealth's fourth-quarter results were solid, but executives warned about pressures associated with the Affordable Care Act this year.

Dawn Villella, Bloomberg News

Stephen Hemsley

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Optum helps push profit up 15 percent at UnitedHealth

  • Article by: Jackie Crosby
  • Star Tribune
  • January 16, 2014 - 9:09 PM

UnitedHealth Group Inc.’s surging business services unit, Optum, has been drawing accolades for bringing stability to the erratic federal health insurance exchange.

After years of investments in technology and capital, the division also is making measurable contributions to UnitedHealth’s bottom line.

The Minnetonka-based company said Thursday that earnings rose 15 percent in the fourth quarter, driven by substantial gains from Optum as well as increases in its insurance rolls.

Results exceeded analysts’ expectations, with profits rising to $1.43 billion, or $1.41 a share, from $1.24 billion, or $1.20 a share, a year ago.

Health reform efforts are squeezing profits from all national insurers, but Optum serves as a “strong growth engine” for UnitedHealth, said Leerink Research analyst Ana Gupte.

“That saved the day,” Gupte said. “Optum’s the reason they’re doing relatively OK. It could be a lot worse.”

CEO Stephen Hemsley said the company’s diversity of products and services drove “exceptional growth” during the quarter. Revenue climbed to $31.1 billion from $28.8 billion in last year’s final quarter.

Analysts expected earnings of $1.40 a share on revenue of $31 billion.

But in a conference call with analysts, Hemsley warned of “near-term pressures” in the year ahead from the implementation of the Affordable Care Act. Those pressures, along with cuts to federal reimbursement for the company’s Medicare business for seniors, will divert more than $1.50 per share in earnings in 2014.

Hemsley said the full-year outlook for 2014 remains the same, with revenue of $128 billion to $129 billion and profit in the range of $5.40 to $5.60 a share.

UnitedHealth is the first among the large, for-profit insurance companies to report earnings and is considered a bellwether for the industry. Hemsley’s warning about costs related to the new federal health care law unnerved investors, with UnitedHealth shares finishing the day down 2.8 percent at $72.76.

With the Affordable Care Act’s emphasis on cutting costs, Optum’s business expertise has been in high demand. Based in Eden Prairie, Optum operates in such areas as IT consulting, health data mining, electronic health records and wellness plans. The company recently was brought on to help assess operations at Minnesota’s health insurance exchange, MNsure.

After years of investment by UnitedHealth, Optum’s less-regulated and higher-margin operations have become a valuable hedge to the more unsettled and volatile health insurance business.

During the quarter, Optum eclipsed gains from UnitedHealth’s benefits business. Earning from operations shot up 43 percent at Optum, compared with UnitedHealthcare’s 12.5 percent gain.

Thomas Carroll of Stifel Nicolaus & Co. said he expects Optum’s contribution “to climb and drive higher valuation” over time, noting in a research note that it now accounts for nearly a third of consolidated revenue and a quarter of consolidated earnings.

But UnitedHealth still gets most of its revenue from its insurance business, UnitedHealthcare, which posted revenue of $113.8 billion last year. Nearly 90 million Americans are insured by UnitedHealthcare through individual and business health plans as well as government programs for seniors and low-income earners.

Enrollment in those plans grew by 4.5 million for the year, including nearly 170,000 people in the fourth quarter.

While Optum has been tapped to help straighten out glitches with new online health exchanges at the federal level and in states such as Minnesota and Maryland, its corporate parent has taken a conservative approach to selling its ­insurance on the exchanges.

UnitedHealth is only partici­pating in a dozen state-based exchanges in this inaugural year. Analysts such as Gupte believe the stance makes United­Health “poised for more upside than downside” in 2014.

“The industry as a whole is conservative, but [UnitedHealth is] probably more conservative even than their peers,” she said. “Next year they’ll have better margin performance at the expense of membership, but margins drive this business as far as immediate earnings. You have to balance that with growth outlook in the long term.”

Jackie Crosby • 612-673-7335

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