The challenges facing America's biggest health insurer range from the uncertain to the unknowable.

Unemployment could continue to surge, cutting membership rolls. Health reform could produce a new government health plan, creating competition and crimping profit. Swine flu could push up medical costs.

For now, though, Minnetonka-based UnitedHealth Group has reason to celebrate.

Despite a continued drop in commercial members in the recession, UnitedHealth reported Tuesday better-than-expected earnings for the second quarter because of lower administrative costs and strong growth in its public-sector businesses, Medicare and Medicaid.

For the quarter ended June 30, UnitedHealth said net earnings were $859 million -- a 154.9 percent increase from $337 million a year earlier, when earnings were dragged down by big lawsuit settlement costs.

Earnings per share jumped to 73 cents from 27 cents a year earlier. Analysts had forecast 70 cents. Quarterly revenue was up slightly, to $21.7 billion from $20.3 billion.

"We would characterize this quarter as solid with strong execution," said chief executive Stephen Hemsley.

Joshua Raskin, an analyst with Barclays Capital, called it a "very strong result" in a note to investors.

UnitedHealth stock rose 75 cents, or 3 percent, to close at $25.59 Tuesday.

Strong outlook

The company raised its 2009 earnings outlook to between $3 and $3.15 per share, the higher end of its previous outlook of $2.90 to $3.15.

It is now projecting that full-year revenue could approach $87 billion. Some think that could go higher. "I am of the opinion that the numbers will continue to rise," said David Heupel, a portfolio manager at Thrivent Financial for Lutherans, who owns UnitedHealth stock, "unless something drastically changes in the economy or the medical cost line."

For the second quarter, the insurer's medical cost ratio -- the portion of premium revenues it spends paying medical claims -- rose slightly to 83.6 percent, up 40 basis points from the previous year, partly because of swine flu. An uptick in doctor visits and diagnostic tests cost the insurer an extra $50 million.

Pressed on the analyst call to discuss the outlook for swine flu, Hemsley said the full-year projections assumed a normal flu season: "We do not have a pandemic in our outlook."

UnitedHealth ended the quarter with 25 million commercial members, 410,000 less than the previous quarter.

Its public-sector businesses fared better, with 1.7 million members in Medicare Advantage plans, up by 45,000. It had 2.6 million Medicare Supplement clients, up 25,000. It also added 55,000 Medicaid members, bringing that total to 2.7 million.

In all, UnitedHealth had 32 million members June 30.

Hemsley said he did not think unemployment has peaked. For the entire year, UnitedHealth expects a loss of 1.5 million commercial members. That will be partially offset by a gain of 785,000 Medicare and Medicaid members.

Health reform is another big unknown, with far-reaching implications for insurers as the government tries to expand coverage and cut costs.

Insurers such as UnitedHealth oppose the so-called public option, a government-run alternative to private insurance, which President Obama has said is needed to keep private insurance companies "honest." Insurers say such a public plan would have an unfair advantage in setting payments to doctors and hospitals.

Diversification helps

Hemsley cited the company's ongoing diversification as a strength. Early this week, UnitedHealth said it was acquiring the northeast subsidiaries of Los Angeles-based Health Net Inc. for about $510 million, bolstering its presence in New York, Connecticut and New Jersey.

Last week, it announced a five-year contract worth $28.1 billion from the Defense Department to manage medical benefits for 3 million active duty and retired military service members and their families in the southern part of the country.

Also last week, UnitedHealth said it intended to invest $100 million over three years to set up 200 sites for telemedicine, allowing patients in rural areas or workplaces to consult doctors using videoconferencing.

Despite continued worries about member attrition, "we are quite positive in terms of the prospects of our business," Hemsley said Tuesday. "Our performance is stronger than ever before and ready for opportunities that present themselves in the long-term and the near-term."

Chen May Yee • 673-7434