For months, investors have worried whether federal reform will crimp the profits of health insurance companies.
But for now, those companies are doing quite nicely, thank you.
UnitedHealth Group Inc. on Tuesday reported sharply higher-than-expected profit in the second quarter, as its commercial business recovered somewhat from the weak economy and its Medicare and Medicaid businesses continued to grow.
For the quarter ended June 30, net income was $1.12 billion, up 31 percent from a year earlier. Revenue grew 7 percent to $23.26 billion. That worked out to earnings of 99 cents per share, outstripping analyst expectations of 75 cents per share.
Chief Executive Stephen Hemsley said the company had used innovation and size to offer "products that have more affordable cost and a better health care experience" resulting in stronger than expected revenue.
UnitedHealth raised its outlook and now expects full-year revenue of $93 billion and net income of between $3.40 and $3.60 a share. Minnetonka-based UnitedHealth is the first large insurer to report earnings this quarter and is a bellwether for the industry.
Stock was volatile
Medical costs for the quarter were lower than expected. The medical care ratio was 81.5 percent, down 2.1 percentage points year over year, partly because of a milder flu season and lighter use of medical care due to a winter storm in the northeast of the country. The ratio measures how much of each premium dollar is actually spent on medical care.
Yet, in a sign of the topsy-turvy world insurers are living in right now, the company's stock fell more than 1 percent before recovering and closing Tuesday pretty much flat at $30.83. Some investors worry that the fatter insurance profits, the bigger a target they'll be for regulators, who are still hashing out rules for the health reform legislation.
"There's a fairly vocal contingent on the Street now that thinks the better they do, the worse for them," said David Heupel, a portfolio manager at Thrivent Asset Management in Minneapolis. "The whole group [of health insurance stocks] is pretty much down. It's one of these weird situations where the short term is irrelevant."
UnitedHealth's commercial business, which has steadily lost members as payrolls have shrunk in the weak economy, made a comeback in the second quarter.
UnitedHealthcare, the commercial arm, gained 95,000 people in risk-based benefits programs, offset by a loss of 25,000 people in its fee-based plans. It had 24.59 million commercial members at the end of the second quarter, up from the previous quarter, though still below the 25.03 million a year ago.
Some of that growth was being driven by "leaner" products, said Gail Boudreaux, president of UnitedHealthcare, referring to lower-cost plans with higher deductibles.
The company's Medicare and Medicaid businesses continued to grow, with a total of 7.95 million customers, up from 7.12 million a year ago.
Health reform questions
UnitedHealth's ancillary health services businesses -- health and wellness, data, technology and pharmacy benefit services -- also did well. Revenue from these businesses are eclipsed by revenue from health benefits, but they're growing faster and tend to boast fatter margins.
Looking into 2011, Hemsley spoke of "clear headwinds," including "an uneven and jobless economic recovery," uncertain Medicare reimbursement rates and uncertainty over guidelines for medical care ratios under new legislation.
During Tuesday's morning call, Wall Street analysts had many questions on how health care reform would affect UnitedHealth.
Company officials answered as best they could. Yes, they had included the cost of extending coverage for children up to age 26 -- as stipulated by the new law -- into their cost projections. No, they did not yet know the impact of the new law on small group coverage. Yes, they were already trying out new products in anticipation of a big expansion in the individual health insurance market.
"While people are justifiably focused on health reform, that is only one element of the market dynamic," Hemsley said, adding that the market offered both challenges and opportunities for UnitedHealth.
Chen May Yee • 612-673-7434