UnitedHealth Sniffles

"While Medicare is often cited as the investment rationale for UNH, we highlight that traditional commercial health insurance risk remains the critical factor, comprising close to 50% of company-wide earnings for 2006," he says. "By contrast, Medicare ... will represent just 12% and 14% of company-wide earnings in 2006 and 2007 -- even under very robust Medicare earnings growth assumptions."

Borsch doubts that big acquisitions will keep helping the company out, either. He believes the government has already started pushing back against further consolidation in the industry. Meanwhile, he cites regulatory problems involving UnitedHealth in particular.

Just last week, he points out, UnitedHealth found itself slapped with the biggest fine ever levied against an insurance company by the state of Arizona.

Following a recent "market conduct examination," the Arizona Department of Insurance made UnitedHealth pay $364,750 for alleged violations of state laws. It also ordered the company to correct its practices going forward.

"These are significant findings in areas that directly affect members and providers," the department's director, Christina Urias, said of the review. "I will continue to insist that insurers and HMOs follow the law when it comes to processing member appeals or provider claims and grievances, and the department will monitor these practices in the future."

Borsch, for one, senses reason for concern.

"While the amount of the fine is immaterial to UNH," he concedes, "the pattern of apparently repeated violations is troubling."

On a similar note, Borsch points out that UnitedHealth could face an even bigger penalty ahead. He notes that UnitedHealth has yet to settle a major class-action lawsuit that has been pending against the company for years. In contrast, he says, two major competitors -- Aetna (AET Quote) and Cigna (CI Quote) -- have already paid $160 million each to put that same litigation behind them.