July 19 (Bloomberg) -- UnitedHealth Group Inc., the largest U.S. health insurer, said profit rose 22 percent on gains from government-sponsored medical programs. The shares fell as costs consumed a higher portion of revenue from commercial plans.

Net income for the second quarter climbed to $1.2 billion, or 87 cents a share, from $981 million, or 70 cents, a year earlier, the company, based in Minnetonka, Minnesota, said today in a statement. The profit beat the 81-cent average of 16 analysts. Revenue rose 6 percent to $18.93 billion.

The costs of paying health claims from employer-sponsored plans rose to 81.8 percent of revenue, from 81.2 percent a year earlier. These expenses may offset the boon UnitedHealth has seen from increasing the profitability of its Medicare programs for the elderly and adding 290,000 members in state Medicaid programs for the poor in the 12 months through June 30. UnitedHealth lost at least 10,000 employer-sponsored members.

``For the long run, I'm concerned,'' said Sheryl Skolnick, an analyst with CRT Capital Group in Stamford, Connecticut, in a telephone interview today. ``The business mix is changing, and it puts a lot of pressure on the company to be as efficient as possible to offset that. This can go on for some time, but at some point you can't cut costs enough to overcome a negative margin shift.''

Shares of UnitedHealth fell $1.69, or 3.2 percent, to $51.89 at 4:01 p.m. in New York Stock Exchange composite trading. Stocks across the managed health-care industry fell. All six members of the Standard & Poor's 500 Managed Health Care Index fell, pulling it down 2 percent.

Cost Forecast

UnitedHealth raised its forecast of the portion of revenue from commercial plans that will be paid out for medical claims. The company said the ratio will be 81.5 to 82 percent for the full year, more than the 80 to 81 percent that UnitedHealth predicted in April.

The company attributed the increase to the cost of medical claims from previous quarters that weren't submitted immediately and said it wasn't collecting as much premium revenue as expected. Also, a growing percentage of its commercial customers are larger employers, which have higher ratios, UnitedHealth said in the statement. The medical cost ratio applies to a portion of the company's business.

None of these problems suggest an increase in the health- care inflation rate, said Chief Executive Officer Stephen J. Hemsley in a conference call with analysts today. The rate is expected to remain around 7.5 percent into 2008, he said.

Effect on Competitors

Even if the rise in the company's ratio is unique to UnitedHealth, other stocks of health insurers will suffer, said analyst Justin Lake of UBS Investment Research in New York.

``We do not expect investors to give the group the benefit of the doubt,'' he said in a note to clients before the market opened today. Shares of Humana Inc., a Louisville, Kentucky-based insurer dominated by government-sponsored business, declined 98 cents, or 1.4 percent, to $67.33 at 4:22 p.m. in New York Stock Exchange composite trading. The shares rose 9.8 percent yesterday after the company said its ratio improved in the second quarter.

UnitedHealth provides health insurance plans to 28.7 million Americans. Only Indianapolis-based WellPoint Inc., which has less revenue and is less diversified, provides medical benefits to more customers.

Earnings Forecast

UnitedHealth raised its full-year earnings forecast to $3.43 to $3.48 a share, 2 cents higher on the upper end of the range than its previous forecast on April 19. The figure excludes 8 cents in charges related to stock options, the company said. Third-quarter earnings will be 91 to 93 cents a share, UnitedHealth said today.

The company cut its full-year 2007 revenue forecast by $1 billion, to $76 billion. Because commercial enrollment is unlikely to go up for the health insurance industry, the company is turning to publicly financed programs for growth, Hemsley said.

``Some 100 million Americans are expected to participate in some government program by 2016, and we're exceptionally well positioned to serve them,'' he said.

U.S. officials are pursuing a criminal probe of backdated stock options that cost former CEO William McGuire his job last year. Hemsley succeeded him, and the company named a new chief financial officer and restated earnings, reducing them by $1.53 billion.

Acquisitions

In March, UnitedHealth agreed to acquireSierra Health Services Inc., a Las Vegas-based health plan with 860,000 customers, for $2.6 billion. In May, UnitedHealth bought the Lewin Group, a Washington-based health-policy consulting firm, for an undisclosed sum, adding to its expanding capabilities in analyzing and mining health data.

Of more than 150 companies that sell Medicare Advantage plans, which provide extra benefits such as lower out-of-pocket expenses and health-club memberships, UnitedHealth is the leader, with about 1.3 million members. Medicare will spend $76.3 billion this fiscal year to provide Advantage benefits to 8.6 million senior citizens.

In the second quarter the company extended its collaboration with the advocacy group AARP to expand marketing of Advantage plans to people 65 or older through 2014.

Medicare Advantage was a ``bright spot'' for UnitedHealth in the quarter, said Carl McDonald, an analyst with CIBC World Markets in New York, in a note to clients today.

``This is likely a function of the benefit changes UnitedHealth made to its Medicare Advantage product this year, as it raised premiums, cut benefits and exited unprofitable counties,'' McDonald said.

To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: July 19, 2007 16:53 EDT