UnitedHealth Profit Jumps on Premium, Medicare Gains (Update4)

By Alex Nussbaum
Bloomberg News
July 21, 2009

July 21 (Bloomberg) -- UnitedHealth Group Inc., the top U.S. insurer by sales, said second-quarter profit more than doubled on higher premiums and growing Medicare enrollment, beating analysts' estimates.

Net income climbed to $859 million, or 73 cents a share, up from $337 million, or 27 cents a year earlier, when Minnetonka, Minnesota-based UnitedHealth took a $922 million charge for lawsuit settlements. The insurer raised the low end of its 2009 earnings forecast. Chief Executive Officer Stephen Hemsley said job losses would create a "challenging" 2010.

Hemsley has offset a decline in private customers caused by the recession with higher premiums and a 15 percent rise in government-backed Medicare and Medicaid business. While UnitedHealth had a "good quarter," medical costs rose and the government business will be less profitable for the company in the long run, said Sheryl Skolnick, a CRT Capital Group LLC analyst in Stamford, Connecticut.

"Relative to where we expected the company to be, it's not a bad quarter by any stretch of the imagination," she said in a telephone interview. The rising reliance on Medicare "is something that certainly bears watching and might mitigate any real excitement about this outperformance."

UnitedHealth rose 75 cents, or 3 percent, to $25.59 in composite New York Stock Exchange trading at 4 p.m. The insurer, the first managed-care company to report earnings this quarter, has risen 7.4 percent in the past 12 months.

'Challenging' 2010

While UnitedHealth expects U.S. job losses to moderate in the second half of 2009, the company expects "no meaningful employment gains" in 2010, Hemsley said in a conference call with analysts today. The insurer also expects pressure from the government to keep down Medicare costs, he said.

"2010 looks like a challenging year for us and I clearly think it will be for everyone" in the industry, Hemsley said. "We also don't necessarily believe we have hit bottom" in the recession, he said.

UnitedHealth said yesterday it would buy the northeast business of rival Health Net Inc. for as much as $610 million. Its earnings may not move shares for long, given investor worries over the recession and health-care legislation in Washington, said Carl McDonald, an Oppenheimer & Co. analyst in New York, in a 16 note to clients today.

Sales Rise

Sales rose 7 percent to $21.7 billion. UnitedHealth also raised the lower end of its forecast for full-year earnings to $3 to $3.15, from the $2.90 to $3.15 it predicted April 21. Earnings topped the 70-cent average estimate of 17 analysts in a Bloomberg survey. Share repurchases and a lower-than-expected tax rate contributed to the performance, Skolnick said.

UnitedHealth paid 83.6 percent of premium revenue to doctors, hospitals and other providers, up from 83.2 percent. The company cited an increase in costlier Medicare and Medicaid patients, as well as increased illness due to the H1N1 swine flu virus. The medical expenses are watched by analysts as an indicator of future industry profits.

The company said Jan. 12 it expects the number of customers who get coverage through their jobs or buy it on the open market to drop by as much as 1.5 million, as the U.S. faces its worst employment losses since the end of World War II. Commercial enrollment fell 5.5 percent from a year earlier to 15.4 million people. Medicare and Medicaid membership jumped 15 percent, to 7.12 million.

Overall enrollment in medical plans was down to 32.1 million, from 32.7 million a year earlier, the company said in its statement.

Medicare Rises

Through June 11, UnitedHealth had added 260,000 Medicare enrollees this year, above the company's forecast of 200,000, Oppenheimer's McDonald said in a July 16 note, citing U.S. government data. It's won the business by offering lower premiums than rivals WellPoint Inc. of Indianapolis and Humana Inc. of Louisville, Kentucky, he said.

"While the short-term outlook seems fine, our concern is that United's Medicare bidding strategy in 2010 will make it difficult for the company to show any material earnings next year," he said.

UnitedHealth's revenue of $20.3 billion and net income in last year's second quarter were reduced by the legal settlements over the company's backdating of stock options for senior executives.

Stock options allow holders to buy shares later, usually at the trading price on the day the options were granted. Through backdating, companies retroactively change grant dates to those with lower stock prices, giving recipients built-in profits when shares rise.

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