Revision Reignites Fears About Industry Outlook; Net Lower Than Expected
UnitedHealth Group Inc. reported disappointing earnings and became the latest managed-care titan to slash its profit forecast, reigniting concern about the industry's outlook amid the rising cost of health care and insurance in a rocky economy.
Shares of UnitedHealth, the country's second-largest insurer by number of health plan members, fell during the day Tuesday to $33.48, their lowest point in nearly four years, and ended at $34.15, down 9.7%. The company cited accelerating medical costs and a sharp decline in commercial health-plan members as reasons for its poor first-quarter performance. Though its executives had braced the market for a possible cut in the company's profit outlook, the 10% reduction in expected 2008 earnings a share caught Wall Street by surprise.
UnitedHealth now expects earnings this year of between $3.55 and $3.60 a share, 40 cents lower than the range it forecast earlier this year. "These financial results are not acceptable for a company with our capabilities and potential," said UnitedHealth's chief executive, Stephen Hemsley, who attributed the disappointing results to "our own performance" and the economy.
Some of UnitedHealth's wounds are self-inflicted. The company has been struggling to overcome customer-service problems brought on in part by troubles integrating its 2005 purchase of PacifiCare Health Systems. It has lost some disgruntled customers in the process.
But its thornier problems appear to be more widespread. Economic woes are forcing more employers to cut back benefits or switch to plans that yield less profit, while layoffs are helping to shrink the market of jobs offering health benefits. Also, Mr. Hemsley said, more employed people decline coverage, especially with small companies.
That presses health insurers to compete for customers on price, just as UnitedHealth and some rivals report unexpected upticks in medical costs. The combined effect raises the risk costs will outrun premiums and endanger the record profit margins Wall Street has come to expect from insurers. WellPoint Inc., the largest U.S. insurer by number of health-plan members, which reports earnings Wednesday, set off a fire sale of the sector's stocks last month with a profit warning.
Excluding recent acquisitions, UnitedHealth in the quarter lost 30,000 members from fee-based employer health plans and 530,000 from plans for which it charges premiums to take on the risk of insuring. It blamed a bad flu season for a higher-than-expected 81.5% medical-loss ratio -- the share of premiums it spends on medical costs.
By: Vanessa Fuhrmans & Dinah Wisenberg Brin
Wall Street Journal; April 23, 2008
