UnitedHealth Group Inc posted a much higher-than-expected second-quarter profit, helped by growth in its government health insurance plans for elderly and low-income Americans, and lower spending of premium revenue on medical costs.
The largest U.S. health insurer by market value also on Tuesday raised its full-year profit forecast, and its shares rose 2.2 percent in premarket trading.
UnitedHealth kicked off what is expected to be a strong earnings reporting season for health insurers. However, Wall Street enthusiasm for the industry may be tempered as investors question whether its performance will be sustainable under the new U.S. healthcare reform law.
UnitedHealth's solid report, highlighted by lower-than-expected medical costs across all product lines, could allow investors to gain comfort about results for next year, when some of the potentially onerous reforms begin, said Collins Stewart analyst Brian Wright.
There is still clearly uncertainty about 2011 results, Wright said. But with UnitedHealth's improved 2010 outlook, he said, the deterioration that people think is going to happen in 2011 is going to come from a much higher starting point.
Wall Street is concerned about the hit to profits next year from new regulations that will mandate how much insurers spend on medical costs. Government regulators are also cracking down on proposed premium rate increases by the insurers, presenting another obstacle.
For the quarter, UnitedHealth said net income increased to $1.12 billion, or 99 cents per share, from $859 million, or 73 cents per share, a year earlier.
Analysts on average expected 75 cents per share, according to Thomson Reuters I/B/E/S.
Revenue rose 7.4 percent to $23.26 billion. Analysts looked for $22.97 billion.
In its Ovations business, which includes its Medicare plans for the elderly, revenue grew 13 percent to $9 billion. UnitedHealth, the biggest provider of privately run Medicare Advantage plans, saw its membership in such plans rise 17 percent.
Revenue in its business serving low-income Medicaid recipients jumped 21 percent to $2.5 billion. Its Medicaid membership increased 16 percent.
Membership in the company's plans that serve employers and individuals slipped nearly 2 percent from a year earlier to 24.59 million, but was up slightly from the first quarter. Commercial health insurance plans have taken a hit during the economic downturn as fewer workers mean fewer carrying health insurance.
UnitedHealth spent 81.5 percent of premium revenue on medical care in the second quarter, down from 83.6 percent a year earlier, helped by realizing reserves for medical claims from prior periods.
An improvement in that spending ratio historically has been hailed by Wall Street as a solid sign of profitability. But such gains are now seen as potentially short-lived because the new law will set how much the companies must spend on medical care.
UnitedHealth raised its full-year profit forecast to a range of $3.40 to $3.60 per share. The company previously had projected $3.15 to $3.35, which was an increase from its initial projection of $2.90 to $3.10 a share.
UnitedHealth shares rose 2.2 percent to $31.50 in premarket trading.
(Reporting by Lewis Krauskopf; Editing by John Wallace and Maureen Bavdek)