UnitedHealth: $1.3B quarterly profit

By now, the drill is familiar: UnitedHealth Group's profit beats expectations. The company raises its earnings outlook. The stock falls. Repeat.

Such is life these days for a health insurer facing regulatory reform on the horizon.

On Tuesday, Minnetonka-based UnitedHealth reported stellar third-quarter earnings, boosted by strong membership growth and lower hospital costs.

"UnitedHealth has been performing very well on an operational level, partly because of lower hospital utilization," said Sarah James, an analyst with Wedbush Securities.

The insurer gained members in both its commercial and government businesses for health benefits. Its smaller health services businesses -- pharmacy management and consulting and technology services -- also grew rapidly.

"This year is shaping up to be our most well-rounded performance," said chief executive Stephen Hemsley.

By the end of the day, the company's share price had fallen 2.6 percent to $35.30.

Between now and 2014, health reform is expected to boost the market for UnitedHealth's products as the federal government expands the Medicaid program and begins offering subsidies to help people buy private insurance on new health plan exchanges.

But under the new health law, insurers will also be required to spend a certain portion of premiums on medical costs, rather than on administration or profits. That metric is known as the medical loss ratio (MLR). Raising their MLRs to meet new federal guidelines will mean slimmer profits for insurers.

In other words, the better they do now, the more they have to lose.

"We recognize there will be an unfavorable impact on the MLR regulation," Hemsley said. "We need guidance from [the U.S. Department of Health and Human Services] to quantify that impact."

Net profit for the quarter ended Sept. 30 rose 23 percent to $1.3 billion, or $1.14 per share, blowing past analyst estimates of 84 cents per share. Revenue rose 9 percent to $23.7 billion.

The insurer's medical loss ratio was 80.1 percent, 1.9 percentage points lower than the same period a year earlier.

UnitedHealth's Medicare and Medicaid business gained 1 million members compared with a year ago. Its commercial insurance business gained members for the second quarter in a row, a reversal of the losses during the recession. Compared with a year ago, though, that business was down 55,000 people.

"Overall, we feel positive about the benefits market going forward," Hemsley said. Nonetheless, he added: "Our tone entering 2011 is appropriately measured."