Wall Street losing patience with UnitedHealth

The frustration was palpable on the morning conference call of UnitedHealth Group, the former Wall Street star.

After Minnetonka-based UnitedHealth announced lower-than-expected earnings for the first quarter and cut its outlook for the full year, analysts closed in.

"How do we get the confidence that this is the last time performance is going to be disappointing?" asked one. Another said she was "struggling" to reconcile projected earnings against rising medical costs. Yet another analyst questioned if the company's membership growth expectations were realistic, given the fact that open enrollment season was over.

It was a far cry from just a couple of years ago, when America's biggest health insurer could do no wrong and double-digit earnings growth was a given.

UnitedHealth's woes reflect industry-wide challenges -- rising medical costs and the paring of benefits by employers -- as well as its own problems.

Those include bad service that drove away customers and the aftershocks of a stock-options scandal that ousted longtime chief executive William McGuire.

UnitedHealth said revenue for the first quarter was $20.3 billion, up 7 percent from the same period a year earlier. But net earnings were down 4 percent to $994 million. That translated to 78 cents per share, just shy of the 79 cents per share on average expected by analysts.

The company expects its medical-care ratio, the portion of premiums that goes toward paying medical bills, to inch up to 81.3 percent this year, from 80.6 percent in 2007. A higher medical-care ratio is bad for insurers because it means narrower profit margins.

It said it plans to buy back $4 billion worth of shares from the market this year.

Investors tire of apologies

The company acknowledged that it could do better.

"These financial results are not acceptable for a company with our capabilities and potential," said Stephen Hemsley, president and chief executive. "They are due in part to broader economic challenges and in part to our own performance."

Hemsley's willingness to acknowledge missteps was seen as a breath of fresh air when he took the helm in late 2006. But it appeared Tuesday that investors were tired of hearing apologies.

UnitedHealth stock fell almost 10 percent to $34.15.

Sheryl Skolnick, an analyst with CRT Capital, swiftly downgraded the stock from "buy" to "fair-value," citing a lack of confidence in management.

UnitedHealth lost 530,000 members in its important commercial, or fully insured, business in the first quarter -- 130,000 more than initially expected. It now expects commercial enrollment to fall by 700,000 this year.

There were a few bright spots amid the gloom.

The company's smaller, non-core businesses did particularly well. At Ingenix, its health information technology arm, operating earnings grew by 23 percent to $47 million for the quarter. Operating earnings at Prescription Solutions, a pharmacy benefits division inherited through the recent acquisition of California's PacifiCare, doubled to $98 million.

Medco contract extended

The company also said it had extended a key contract with Medco Health Solutions to manage its pharmacy benefits through 2012.

The Medco contract, due to expire at the end of 2009, has been a focus of speculation since UnitedHealth inherited Prescription Solutions, and analysts had wondered if UnitedHealth would bring its entire drug benefits business inhouse, providing a much-needed area of growth. Managing drugs is a lucrative business at a time when providing insurance is less so.

That was evident from market reaction to the announcement. Even as UnitedHealth stock fell Tuesday, Medco's stock rose about five percent to $2.69.