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UnitedHealth Says 2011 Profit May Drop as Costs Rise

Updated on
UnitedHealth CEO Stephen Hemsley
Stephen Hemsley, chief executive officer of UnitedHealth Group Inc. Photographer: Jay Mallin/Bloomberg

Oct. 19 (Bloomberg) -- UnitedHealth Group Inc., the biggest U.S. insurer by sales, said 2011 profit may decline because of rising medical costs and the U.S. health-care overhaul. The forecast sent the company’s shares down the most in two weeks.

Earnings may fall as UnitedHealth meets a new regulation requiring insurers to spend more money on patient care, Chief Executive Officer Stephen Hemsley said on a conference call today. UnitedHealth shares dropped as much as 3.7 percent.

A jobless rate over 9 percent has kept Americans away from the doctor this year, enabling Minnetonka, Minnesota-based UnitedHealth to report third-quarter earnings today that beat analyst estimates and to raise its 2010 profit forecast. Physician visits may increase next year, Hemsley said today.

“We anticipate some level of year-over-year reduction,” Hemsley said on the conference call. “But we simply can’t quantify the extent until regulations are released and can be thoroughly analyzed and quantified.”

The insurer, the first managed-care company to report earnings this quarter, sank 95 cents, or 2.6 percent, to $35.30 at 4 p.m. in New York Stock Exchange composite trading. The stock has climbed 6.8 percent since March 30, when President Barack Obama signed legislation designed to extend insurance coverage to 32 million Americans.

Reform Uncertainty

Rival health insurers followed UnitedHealth down for the day, led by a 3.9-percent drop for WellPoint Inc. of Indianapolis and a 3.4-percent decline for Aetna Inc., based in Hartford, Connecticut.

The shares’ drop is “the same trend that’s happened every quarter this year,” said Sarah James, a Wedbush Securities Inc. analyst in Los Angeles, in a telephone interview. “They have strong results, but it’s just taken over by the uncertainty surrounding health-care reform.”

Third-quarter net income increased 23 percent to $1.28 billion, or $1.14 a share, the company said in a statement today. The profit topped the 85-cent average estimate of 15 analysts surveyed by Bloomberg.

The company spent 80.1 percent of premiums it collected on customers’ medical care, down from 82 percent a year earlier. This year’s percentage is just above the 80 percent minimum required by the health-care law.

Starting next year, the legislation will compel insurers to give customers rebates if spending falls below that level for individual and small-business policies. Health plans will have to spend at least 85 percent of premiums collected from large employers.

The Obama administration and state insurance commissioners are still drafting regulations to implement the spending rules, and UnitedHealth can’t make a more precise forecast for 2011 before the rule is finished, Hemlsey said on the call. He said he may have more information by the insurer’s investor conference in New York on Nov. 30.

The company expects earnings to grow after 2011, he said.

Costs Restrained

Hemsley in July said costs were being restrained by unemployment and a mild flu season. UnitedHealth also gained 750,000 health-plan clients from a year earlier, with revenue from U.S.-backed Medicare Advantage policies for the elderly climbing 11 percent and sales of Medicaid plans to the poor up 29 percent.

The company boosted its earnings forecast for a third time this year, predicting profit of $3.85 to $3.95 a share for 2010 and sales of $94 billion. Analysts had expected an average of $3.62 a share for the year, and $92.9 billion in revenue.

Third-quarter revenue climbed 9 percent to $23.7 billion, also beating analyst predictions. A year-earlier UnitedHealth reported net income of $1.04 billion, or 89 cents a share.

Medical Bills

UnitedHealth saved $230 million as medical bills for previous periods ended up lower than expected, according to the statement. The windfall reflected trends across the industry, and today’s numbers “bode well for the sector,” said Thomas A. Carroll, a Stifel Nicolaus analyst in Baltimore, in a note to clients.

Enrollment in medical plans rose to 32.7 million, from 32 million a year earlier, with the Medicare and Medicaid increases offsetting a decline in plans sold to private employers and individuals, the company said.

Revenue from health services rose 14 percent to $6.2 billion, led by increases at units that provide prescription benefits, consulting to doctors and hospitals and information technology. Hemsley said in July that UnitedHealth wants to expand in those areas as the health-care law squeezes profit margins in the benefits business.

UnitedHealth spent $1.9 billion on acquisitions in the services sector during the third quarter, the statement said. The company announced deals for four medical-software companies in the quarter and for Executive Health Resources Inc., a consultant that advises hospitals on clinical care and billing.

“Deductibles and copays today are almost four times as big as they were five years ago,” said Dave Shove, a BMO Capital Markets analyst in New York, in a telephone interview before the announcement. “When you hit the pocketbook more and times are harder, it makes people hesitate a bit” before seeking care.

To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at Rgale5@bloomberg.net

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