UnitedHealth (UNH) posts big profit, but vulnerable to reform

UnitedHealth Group (UNH) said profit jumped 13% as rising Medicare enrollment offset a drop in private-sector clients lost to unemployment. Upgrading computers, more efficient claims processing, and other cost-cutting steps also beefed up the bottom line. The results were particularly strong given the low confidence expressed by investors recently.

The amount of premium revenue spent on clients’ medical care, the medical loss ratio, came in better-than-expected at 82%. The medical loss ratio is used to gauge future profitability. Expenses were higher than the year before due to the H1N1 flu and the rising number of unemployed customers in the government-subsidized Cobra, where medical use tends to be higher. Revenue increased about 8% to $21.7 billion, more than a third of it from Medicare.

While Medicare’s growth has been a bright spot, it leaves UnitedHealth vulnerable to funding cuts from Washington. There is a very good change that any healthcare bill passed through Congress will limit insurers’ profit margins by cutting Medicare reimbursements, imposing a $6.7 billion-a-year tax on the industry, and banning insurers from denying coverage to sick people. Goldman Sachs Group analyst Matthew Borsch estimates that legislation may cut UnitedHealth’s EPS growth to 6% a year over the next decade, compared with 10% a year if nothing changes.

On the positive side, UnitedHealth can simply raise premiums and slash benefits. This would normally cause membership attrition, but this may not happen if everyone is required to have insurance and other insurers will be raising premiums as well (which is likely). Another positive is that reform legislation is likely to create new subsidies to enable low-income families and individuals to purchase private insurance, thus expanding UnitedHealth’s customer base. Even more, expansions to Medicaid would benefit UnitedHealth’s Americhoice segment.

Either way, this is probably the last time earnings will serve as a catalyst for investors for a while. Instead, all investor focus is squarely on Washington.
--

Peter J. Lazaroff, Investment Analyst