July 19, 2007 / 10:47 AM / 12 years ago

UPDATE 3-UnitedHealth cost trends eclipse profit rise

(Adds details, comments, byline; updates shares)

By Lewis Krauskopf

NEW YORK, July 19 (Reuters) - Insurer UnitedHealth Group Inc. (UNH.N) reported on Thursday deteriorating trends for its health plans serving employers, news that overshadowed a surprising 22 percent rise in second-quarter profit.

The No. 1 U.S. health insurer by market value, shares of which fell 3.5 percent in morning trading, said an important medical cost gauge had worsened from the first quarter for its UnitedHealthcare unit serving mid-size and small businesses and would be less favorable for the year than previously expected.

Wall Street has been homing in on UnitedHealth’s medical-cost results for its commercial plans for employers after the company disappointed in that respect in the first quarter. Continuing increases in medical cost ratios could signal declining profitability at UnitedHealthcare, which represents a huge portion of the company’s overall business.

“The core part of this business is the commercial managed care business, and those trends, while not disastrous, are moderating and therefore removing the potential for upside,” Stifel Nicolaus analyst Thomas Carroll said.

UnitedHealth has largely emerged from a stock-option scandal that plagued it last year. But operational missteps — including cuts to its Medicare forecasts and the worrisome medical cost trends — have made investors uneasy.

Shares fell $1.87 to $51.71 in morning trade on the New York Stock Exchange. They have fallen nearly 4 percent in 2007, underperforming a more than 7 percent rise for the S&P Managed Health Care index .GSPHMO, a barometer of large U.S. health plans.

For the quarter, net income increased to $1.2 billion, or 87 cents per share, from $981 million, or 70 cents per share, a year earlier. Analysts on average had expected 81 cents per share.

Revenue rose 6 percent to $18.9 billion, while premium revenue increased 5.2 percent to $17.3 billion.

The Minneapolis-based company cited strong earnings at its Ovations business, which serves Americans older than 50 and includes its Medicare health plans. UnitedHealth is one of the largest providers of Medicare health plans for the elderly.

“We are getting strong performance out of Ovations and it is offsetting ... the commercial business this year,” UnitedHealth CEO Stephen Hemsley said on a conference call with analysts.

Based on its quarterly results, UnitedHealth lifted the upper end of its full-year earnings projection by 2 cents per share. The company now expects 2007 profit of $3.43 per share to $3.48 per share, excluding certain charges. Analysts expect $3.44.

However, the company cut its full-year revenue forecast to about $76 billion from about $77 billion, reflecting lower membership in its commercial plans for employers than previously expected.

UnitedHealth said its consolidated medical care ratio — which measures medical costs as a percentage of premium revenue — had improved, reflecting strong performance in its business for seniors.

But the medical care ratio for UnitedHealthcare worsened to 81.8 percent from 81.2 percent in the first quarter. The company now expects the unit’s ratio for the full year to be 81.5 percent to 82 percent, compared with its prior forecast of 80 percent to 81 percent given in April.

Unfavorable reserves for future medical claims, a shift to larger businesses with lower profit margins and lower-than-expected premium pricing all hurt the medical-care ratio forecast. Hemsley said the company is not seeing any broad-based increase in use of healthcare services.

UnitedHealth also said that earnings at its Uniprise unit serving large employers declined 9 percent to $201 million.

The company provided full health benefits to 28.66 million members at the end of June, up about 285,000 members from a year before and 160,000 from the first quarter.

Additions of 205,000 members in its Medicaid plans for low-income Americans drove gains, offset by declines for some of its plans for employers and individuals.

Piper Jaffray analyst Melissa Mullikin said the company needs to start showing enrollment growth in its commercial business, outside of acquisitions.

“The enrollment trends are going to have to change,” Mullikin said. “I think they are taking steps to do that; we just haven’t seen that come to fruition yet.”

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