UnitedHealth Falls After Insurer Sees Medical Costs Rising

UnitedHealth Group Inc. (UNH), the largest U.S. health insurer by sales, fell 2.7 percent after the company said medical costs are expected to increase in the fourth quarter and 2012.

UnitedHealth dropped to $45.34 at 4 p.m. New York time after Chief Executive Officer Stephen Hemsley said today that costs would “trend upward.” The stock’s decline dragged down shares of other health insurance companies.

The Minnetonka, Minnesota-based insurer saw a pickup in physician visits and use of outpatient services, Hemsley said on a conference call with analysts. Health insurers have seen their income rise over the last year as consumers, worried by unemployment topping 9 percent, put off elective procedures and having babies. Now rising use, coupled with pockets of price competition, may affect future profitability, Hemsley said.

“Caution is the appropriate tone” for 2012, the CEO told analysts. While he said the company expects to see its earnings increase next year, he declined to give specific numbers.

UnitedHealth’s outlook on costs weighed on rival insurers. WellPoint Inc. (WLP), the largest insurer by enrollment, fell 2.4 percent to $64.06. Aetna Inc. (AET) declined 1 percent to $37.10, while Cigna Corp. (CI) dropped less than 1 percent to $43.43.

Nervous Investors

“This is a volatile market and people get very nervous when they hear companies give cautionary warnings,” Chris Rigg, an analyst at Susquehanna Financial Group in New York, said in a telephone interview. “That said, I feel like Steve put a stake in the ground and said the company’s going to increase earnings. I wasn’t so sure before.”

UnitedHealth’s ability to monitor rising costs and consumer demand enables the company to price products to help ensure growth, Chief Financial Officer Dave Wichmann said in a telephone interview. The data also have helped the company to cut costs without harming patient care, he said.

“It’s going to be a tough year with many headwinds,” Wichmann said. “But our added intelligence around trends means we can keep growing, even after a year as good as this one.”

While consumers are beginning to use more health services, the demand is still below historical trends, Hemsley said on the call. The exception is Medicare and Medicaid, the national health plans serving the elderly, disabled and poor, where demand is close to normal, he said.

Pharmacy Benefits Investment

UnitedHealth is investing in the pharmacy benefits management unit, OptumRX, to absorb 12.4 million members the company is taking back when a contract with Medco Health Solutions Inc. ends at the beginning of 2013, Wichmann said. UnitedHealth will have spent $45 million by the end of this year to upgrade systems and will invest “substantially more” next year when it begins hiring workers to handle the new members.

The insurer also must spend an unspecified amount, which may be two to three times the investment in the pharmacy benefits unit, on upgrading diagnostic coding to comply with federal regulations, Wichmann said. The expenditure wouldn’t interfere with the company’s ability to do acquisitions if opportunities arise, he said. The company has about $1.3 billion in cash on hand, Hemsley said.

Earlier, UnitedHealth raised its 2011 earnings forecast, to $4.40 to $4.45 a share, from a July 19 outlook of $4.15 to $4.25. Third-quarter revenue rose 6.8 percent to $25.3 billion, and earnings per share beat by 5 cents the average estimate of 11 analysts surveyed by Bloomberg.

Medicare Growth

UnitedHealth’s Medicare Advantage managed care plans grew 8 percent, with 30,000 new members in the quarter, the company said. The increase indicated UnitedHealth has been able to recruit baby boomers who are reaching 65, said Sheryl Skolnick, an analyst at CRT Capital Group LLC in Stamford, Connecticut. Overall, enrollment rose by 220,000, the company said.

UnitedHealth is also increasing revenue as customers switch to high-deductible plans and are demanding more support services around them, said Dave Windley, an analyst at Jefferies & Co. in Nashville, Tennessee.

Third-quarter net income was little changed at $1.27 billion, or $1.17 a share, UnitedHealth said. Profit for UnitedHealth, the first of the health insurers to report, has exceeded the consensus forecast by analysts for eight straight quarters, according to data compiled by Bloomberg.

When the earnings statement was reported, UnitedHealth drew kudos from analysts for the added enrollment.

“The results look solid,” said Dave Shove, an analyst at Bank of Montreal in new York. “The raised guidance shows company confidence in current trends, solid premium growth and manageable medical costs.”

The shares fell on comments about 2012 during the call. The company will release more specifics on 2012 on Nov. 29 at a shareholder meeting.

To contact the reporter on this story: Pat Wechsler in New York at pwechsler@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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