UnitedHealth Group Inc., the second-biggest U.S. health insurer, said Thursday that its first-quarter profits were up 41 percent over the same period last year, boosted by new acquisitions, growth – especially within UnitedHealthcare – and successful efforts to contain medical costs.
As a result, the company raised its forecast for 2005, to a projected 23- to 24-percent earnings increase over 2004.
“It is shaping up to be a very strong year,” CEO Dr. William McGuire said in a conference call. He predicted 2005 revenues to hit at least $45 billion, with about an 11.6-percent operating margin increase.
United’s first-quarter net income was $779 million, or $1.16 a share, up from $554 million, or 88 cents, a year earlier, the Minnetonka, Minn.-based company said in a statement. Revenue rose 34 percent, to $10.9 billion.
UnitedHealth’s revenue topped $10 billion for the second straight quarter, boosted by acquisitions including the $4.6 billion takeover of Oxford Health Plans Inc. in July.
Purchases by the industry’s three biggest insurers may leave too few acquisition targets to raise enrollment at the same pace, said William Braman of Fortis Investments in Boston.
“The company is not telling you they’re going to get a lot of new enrollee growth,’’ Braman, who helps manage about $8 billion as chief executive officer at Fortis, told Bloomberg News in an interview. Fortis owns about 400,000 shares of UnitedHealth, according to regulatory filings. The three biggest insurers “have rolled up a lot of the industry. It’s questionable how much more organic growth they can put on top of that.’’
UnitedHealth was expected to earn $1.13 a share for the quarter, the average estimate of 20 analysts surveyed by Thomson Financial.
The company forecast earnings per share of $4.85 to $4.90 a share this year, which would be growth of 23 percent to 24 percent and is higher than the average analyst estimate of $4.82. The company said in January that full-year earnings probably would be $4.75 to $4.80 a share, according to chief financial officer Patrick Erlandson.
In the earnings conference call, McGuire said as 2004 claims matured, United was finding actual medical costs were turning out to be lower than predicted. He also said the company is “becoming more effective in medical cost containment and care facilitation,” which he said is “having a very positive impact” on the bottom line.
Growth in medical spending had slowed as employers’ insurance plans shift more responsibility for medical costs onto workers, McGuire said in January. Higher deductibles and co-payments help insurers control expenses because they discourage some employees from filling prescriptions or making office visits.
UnitedHealth has the ability to keep drug prices lower than some competitors because it has leverage with the pharmaceutical suppliers, said CIBC World Markets analyst Carl McDonald told Bloomberg in an interview.
“UnitedHealth has some advantages because it’s the second-biggest company in the industry,’’ he said. WellPoint Inc. is the biggest U.S. health insurer.
United’s operating margin for its health care business widened to 9.5 percent in the first quarter, from 8.2 percent a year earlier because of cost-cutting, according to the statement. Operating costs decreased as a percentage of revenue across the company. Revenue in the year-earlier quarter was $8.14 billion.
The Oxford Health purchase added about 1.5 million customers in the New York metropolitan area. UnitedHealth also bought Mid Atlantic Medical Services Inc. in February 2004 for about $2.95 billion and closely held Definity Health Corp. in December for about $300 million.
“For the last several years they have done a tremendous job growing their business through acquisitions and by keeping costs low, and by taking share from other companies,’’ said Michael Obuchowski, who helps manage $35 million at Altanes Investments LLC in New York, including shares of UnitedHealth and WellPoint Inc. He spoke before the earnings release. “That was a great strategy at the time when the economy was growing slowly.’’
McGuire said UnitedHealth would continue to consider buying other companies, although it would be cautious to avoid “overheated’’ valuations.
– Bloomberg News and PBN Staff
