New York investigation may distract, cost UnitedHealth

A day after New York's attorney general took aim at UnitedHealth Group's health-care reimbursement procedures, the ultimate financial implications for the nation's largest insurer were yet to come into focus.

But there is little doubt that Andrew Cuomo's probe has handed company executives a significant distraction and a bit of a black eye.

Although some analysts believe UnitedHealth will continue to operate with minimal bottom-line effect during Cuomo's fledgling inquiry and expected lawsuit, the consensus is far from unanimous. The investigation involves several large insurers, but it is also UnitedHealth-specific.

"This has to be taken seriously," said Sheryl Skolnick of CRT Capital Group. "Ultimately, the attorney general may not be able to prove anything, but it's another mark of less-than-perfect behavior by United."

Cuomo's move comes at a bad time for Minnetonka-based UnitedHealth; it is facing hefty fines in California for denied and misprocessed claims, and has acknowledged strained relations with doctors and insurance brokers.

The New York investigation involves the UnitedHealth subsidiary Ingenix, which collects and analyzes claims data that then are used to negotiate rates for reimbursement of doctors, hospitals and other providers when care is given. Other insurers also use the Ingenix data base.

Cuomo asserts that Ingenix manipulates data to lower its reimbursement obligation when patients go to doctors outside of their insurance plan's network. Providers within the network have negotiated rates; the out-of-network providers do not. Payment to out-of-network providers is based on "reasonable and customary" fee as determined by the insurer.

Several analysts view Cuomo's case as evidence that the regulatory world for managed care insurance companies is about to change.

"This development is very consistent with our view that the regulatory environment is going to get tougher for managed care," said Doug Simpson of Merrill Lynch. "The last seven years have been pretty quiet and we continue to expect that to change for the worse."

UnitedHealth has supporters who attribute Cuomo's actions, in part, to the platform he has as attorney general for the state of New York and as consistent with his crusading and headline-grabbing predecessor, Gov. Eliot Spitzer.

"Going after managed care is always popular," said David Heupel, portfolio manage of the Thrivent Large Cap Growth Fund in Minneapolis. "This really isn't a very egregious accusation that can be made here. The data and robustness of Ingenix [are] hard to question."

Heupel also said that if Ingenix's methodology was adjusted to pay more to the out-of-network doctor, the result likely would be higher premiums for customers.

"UnitedHealth's data-management methodology has been consistent for several years, and we suspect if something was flagrantly biased, previous allegations would have been more successful," Shove wrote in report to investors Wednesday.

Goldman Sachs analyst Matthew Borsch projected UnitedHealth's exposure in the likely lawsuit filed by Cuomo to be in the neighborhood of $3 billion, based on a settlement in New Jersey involving Health Net over similar underpayment claims.

Other analysts predicted a long, drawn-out investigation that could become financially complicated if attorneys general in other states file lawsuits with similar allegations.

In the short term, Skolnick said, the allegations could hurt UnitedHealth where it least needs it -- in the eyes of the insurance brokers who steer employers from one insurer to another.

"This will be a setback for the broker community," Skolnick said. "The whole industry may suffer, but Ingenix belongs to United. This makes it more difficult to repair relationships."