UnitedHealth Group Inc. (UNH), the biggest U.S. health insurer, increased its 2012 earnings forecast after reporting that first-quarter profit beat analysts’ estimates for higher enrollment and low medical costs.
Full-year earnings will be $4.80 to $4.95 a share, the Minnetonka, Minnesota-based company said in a statement today. UnitedHealth’s shares climbed, along with other health insurers, after Chief Executive Officer Stephen Hemsley said he expects only a “gradual” rise in health spending this year.
UnitedHealth had 35.6 million people enrolled in its medical plans, an increase from 34 million a year earlier, with gains in both commercial plans and government-backed Medicare and Medicaid coverage. The insurer has also benefited from lower-than-projected costs as Americans cut back on health care and opted for higher deductibles amid the weak economy.
“Bottom line, it’s a pretty decent report,” said Thomas A. Carroll, a Stifel Nicolaus & Co. analyst in Baltimore, in a telephone interview. “To the extent they made positive comments about cost trends,” the results will boost sentiment for all health insurers, he said.
UnitedHealth, the first major insurer to report first- quarter earnings, rose 2.4 percent to $58.71 at the close in New York. The Standard & Poor’s 500 Managed Care Index (S5MANH), consisting of the six biggest publicly traded carriers, climbed 1.9 percent, while the broader S&P 500 declined 0.6 percent.
WellPoint Inc. (WLP), the second-biggest health plan, is due to announce its results on April 25.
UnitedHealth on Feb. 9 had forecast full-year profit of $4.60 to $4.80 a share. Analysts had estimated an average $4.87 for 2012.
First-quarter net income rose 3.1 percent to $1.39 billion, or $1.31 a share, UnitedHealth said in its statement. The results beat the $1.17-a-share average of analysts’ estimates compiled by Bloomberg. Revenue climbed to $27.3 billion from $25.4 billion a year earlier.
UnitedHealth spent 81 percent of premiums collected on medical care, down from 81.4 percent a year earlier.
“This tells you your margins are looking solid for this year, too,” said David Windley, a Jefferies & Co. analyst in Nashville, Tennessee, in a telephone interview. “We’ve been experiencing some very moderate increases in medical costs but so far it looks benign.”
UnitedHealth deserves credit for helping to keep that spending low, through plans that steer customers toward lower- cost doctors or better coordinate care, Windley said.
Hemsley, on a conference call with analysts, said it’s difficult to say how much of the lower costs were due to permanent changes in insurance coverage and how much were the temporary result of the economy.
“We know from our health-care affordability programs that we are getting traction on those, and those are fundamental improvements,” he said.
The earnings included some one-time benefits that may concern investors, said Stifel Nicolaus’s Carroll. The company booked a $530 million gain from overestimating medical costs in prior quarters, a boost that might not be repeated, he said.
Hemsley has been bulking up with acquisitions of smaller health plans as President Barack Obama’s health-care law puts pressure on profit margins. UnitedHealth completed its $2 billion purchase of XL Health Corp. in February, gaining membership in plans administered for Medicare, the U.S. backed program for the elderly. Last month, the Pentagon announced it had chosen the company for a $20.5 billion, five-year contract to provide benefits to military personnel and their families.
The higher enrollment and lower medical spending helped overcome an increase in operating costs elsewhere. UnitedHealth said in November that it plans to invest $115 million in the pharmacy-benefits unit this year, as it brings in-house business it had been outsourcing to Medco Health Solutions Inc.
“They’re adding staff; they’ve expanded their mail-order operation,” Windley said. “They’ve talked explicitly about spending quite a bit of money to convert” the Medco contract.
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