UnitedHealth still cautious; investors still nervous

UnitedHealth Group Inc. CEO Stephen Hemsley laid out a positive roadmap for 2012 on Tuesday, though he said the health care giant continues to face headwinds from both the economy and an evolving marketplace.

Minnetonka-based UnitedHealth posted third-quarter results Tuesday that beat Wall Street's expectations, while warning of continued challenges. The company expects to continue adding to its insurance rolls, after signing up 220,000 members during a better-than-expected quarter. Revenue is expanding at both its insurance arm, UnitedHealthcare, as well as its services division, Optum, which posted double-digit sales growth in the quarter.

Yet Hemsley also pointed to uncertainty about the economy and regulatory environment. He sees growing price competition in certain commercial markets, as well as higher medical costs as people return to more normal patterns of doctor's visits.

"The challenges are considerable," Hemsley said in a conference call with analysts. "I think caution is the appropriate tone to set at this stage in the environment, both on the broad economic play and in the health care domain."

UnitedHealth's third-quarter net income of $1.27 billion, or $1.17 a share, beat analysts' expectations by 5 cents a share. Total revenue rose 6.8 percent to $25.3 billion.

Yet all Hemsley's level-headed talk of "trying to prudently lay out challenges" made Wall Street uneasy. Shares dropped 2.7 percent to close at $45.34.

"We are not discouraged," Hemsley retorted, as the stock price dipped 6 percent during the morning call with analysts.

Matthew Coffina, a health care analyst with Morningstar, said he didn't understand the market's dim view of earnings, given that unemployment, slow job growth and regulatory pressure to cap profits are headwinds that are "fairly well known."

"In general, United has done very well on the revenue front," Coffina said. "They've been helped by diversification into services [with Optum], which is something their competitors don't have. That combination gives them a favorable outlook compared to their peers."

UnitedHealth is the nation's largest insurance company by revenue. With its new enrollees, it may surpass WellPoint as the largest managed-care organization by membership, Coffina said.

As the first of the large, for-profit insurers to report earnings, United is considered an early indicator of how the industry is weathering the recession as well as the health reform laws that began kicking in this year.

United and other insurers have seen profits grow for a number of years as the recession, unemployment and high-deductible plans prompted patients to put off elective care and non-emergency treatments.

United tied its strong quarterly performance to gains in membership rolls. The company has increased enrollment in every product category -- private, commercial and government programs -- for every quarter for a year, Hemsley said.

Revenue was up 6 percent for insurer UnitedHealthcare, and 22 percent at Optum, whose business includes wellness plans, prescription services and business consulting. Optum posted sales of $7.2 billion for the quarter, with operating margins of 4.4 percent.

Thomas Carroll, an analyst with Stifel Nicolaus, described management as "restrained" in talking about trends that might partially offset the headwinds.

"This approach is not uncommon" in the third quarter, Carroll wrote in a report, "especially as contracts are still being finalized."