UnitedHealth Group Inc. (UNH:US), the biggest U.S. health insurer, declined after Chief Executive Officer Stephen Hemsley said profit margins are being squeezed in its Medicare and Medicaid plans.
UnitedHealth, the first large health plan to report second- quarter earnings this year, slipped 2.4 percent to $54.99 at the close in New York.
While UnitedHealth raised its 2012 profit forecast (UNH:US), the company is still coping with “minimal” rate increases in Medicare, the U.S.-backed plan for the elderly and disabled, Hemsley told analysts today on a conference call. He said the Minnetonka, Minnesota-based insurer may also consider pulling out of Medicaid markets in states where rates “aren’t sustainable.”
“There continues to be more downward than upward pressure across the health-care landscape,” Hemsley said. “We expect this environment to prevail for some time” given the country’s “employment malaise and imminent regulatory changes.”
The insurer forecast full-year profit of $4.90 to $5 a share in a statement before the call, raising guidance for the second time this year. The company also said second-quarter net income (UNH:US) rose 5.5 percent to $1.34 billion, or $1.27 a share, beating analyst estimates.
“There was enough discussion on the call about pricing and budget pressures to spook some folks,” said David Windley, a Jefferies & Co. analyst in Nashville, Tennessee, who reiterated his buy rating today. “I don’t think it should be trading down, but it is.”
The company led a 1.7 percent drop in the Standard & Poor’s Managed Care Index (S5MANH), which consists of the top six health insurers.
UnitedHealth said the percentage of premiums it spends on customers’ care was little changed, continuing a trend that has helped insurers as people have cut back on treatment amid the weak economy. Enrollment in UnitedHealth medical plans rose 5 percent to 35.9 million, according to its statement.
The enrollment (UNH:US) growth was led by Medicare plans, where membership jumped 18 percent, and by the Medicaid business, which increased by 11 percent, the company said. Medicaid is the joint federal-state health plan for the poor.
“We anticipate continued steady growth next year as well, because of the ongoing entrance into Medicare of millions of baby boomers and our expanding market presence,” Hemsley said.
Hemsley said some competitors in the commercial market were offering lower prices on the assumption that medical costs would stay depressed, an estimate UnitedHealth isn’t making. He also said Medicaid rates in some areas were too low for companies to pay their bills.
“If we see situations where we believe the state isn’t prepared to sustain in a particular market, we will withdraw or reposition,” the CEO said. “Discipline has to prevail.”
The company spent 81.3 percent of premiums it collected on benefits, down from 81.4 percent a year earlier, results that show “health-care utilization remains largely unchanged or potentially even lower” compared with prior quarters, said Jason Gurda, a Leerink Swann & Co. analyst in New York.
Per-share earnings beat by 8 cents the $1.19 average of 19 analysts’ estimates (UNH:US) compiled by Bloomberg. Second-quarter sales climbed to $27.3 billion, from $25.2 billion a year earlier.
Sales also rose 4 percent at the company’s Optum division, which provides consulting and data analysis for companies seeking to lower health-care costs and manages pharmacy benefits for employers. Optum revenue climbed to $7.3 billion, despite increased costs related to expanding the drug-benefits business.
UnitedHealth shares have fallen 6.2 percent since the U.S. Supreme Court upheld President Barack Obama’s health-care overhaul on June 28. Indianapolis-based WellPoint Inc. (WLP:US), the second-biggest insurer, has declined 4.9 percent. It’s due to report earnings on July 25.
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