UnitedHealth Profit Up 4%, Sees Higher Medical Costs Ahead

Insurer UnitedHealth Group the nation's second-largest health insurer, said on Thursday its first-quarter profit rose 4%, but the results were hampered by payments related to its stock options problems and weak enrollment in Medicare-related programs.

Shares fell almost 4% as the company forecast a key medical-cost barometer would come in worse than expected for the year.

Investors have been concerned about medical-cost trends for the company's businesses serving employers going into the quarter, said Miller Tabak analyst Les Funtleyder.

Net income rose to $927 million, or 66 cents a share, from $891 million, or 63 cents a share, a year earlier.

The results included 8 cents a share of expenses related to pricing problems with stock options from prior years. Not counting those expenses, UnitedHealth would have earned 74 cents a share. Analysts surveyed by Thomson Financial were expecting profits of 71 cents a share on revenue of $19.37 billion.

Revenue rose 8.3% to $19 billion, including $17.5 billion revenue from premiums.

UnitedHealth said it will pay the tax bill triggered by stock options that were priced wrong when they were granted to non-officer employees. It said it took a $55 million charge for stock options exercised last year and a $57 million charge for increasing the strike price for stock options that have not yet been exercised. It said it would make payments during 2008 to employees who will lose money because the strike prices on their stock options are being raised.

The charges take care of "substantially all remaining tax-based exposures associated with historic options pricing for 2006, and for all future periods," Chief Executive Stephen Hemsley said on a conference call with analysts. He said UnitedHealth could still face expenses from regulators or lawsuits, but any such expenses should mostly be covered by insurance.

"While we are certainly not pleased with this charge, we believe it is a positive step in putting the option-related matters behind the company and resolving any lingering uncertainty," he said.

William McGuire, the former longtime chief executive, left the company in late 2006 after its independent counsel found evidence of stock options that were incorrectly dated to take advantage of share-price rises.

Although UnitedHealth has taken big strides to move past the scandal this year, operational missteps -- including a reduction to its enrollment forecast for Medicare Advantage plans for seniors -- have worried investors.

Medicare Program Weak

Hemsley said enrollment in Medicare's prescription drug program was weak, although he said UnitedHealth signed up a disproportionate share of those who did enroll.

UnitedHealth reported 28.5 million members to whom it provides full-health benefits, up about 1.3% from a year earlier.

UnitedHealth's consolidated medical care ratio -- a key barometer measuring medical costs as a percentage of premiums -- was 82.7%, slightly worse than a year earlier.

For its UnitedHealthcare business that serves mid-size and small employers, the company reported a medical care ratio of 81.2%, worse than some analysts expected.

It projected its full-year care ratio for the business would come in at 80.5%, plus or minus a half-percentage point, worse than the 79% to 80% previously expected.

Unfavorable reserves for future medical claims in the first quarter and a sustained increase in use for certain products contributed to the new forecast, the company said.

Raised 2007 Earnings Forecast

UnitedHealth said it raised its 2007 earnings forecast to a range of $3.42 to $3.46 a share, excluding the charges, compared to analysts' forecast of $3.42.

UnitedHealth forecast full-year revenue of about $77 billion, compared with $77.6 billion expected by analysts.

The company forecast second-quarter earnings of 80 cents to 82 cents a share. Analysts expect 80 cents.

Shares of Minneapolis-based UnitedHealth, the top U.S. health insurer by market value, are little changed in 2007, underperforming rivals WellPoint and Aetna.