UnitedHealth Has Investors Worried

The health insurer is feeling the heat of higher costs and customer dissatisfaction.
By Melissa Davis ,

OKLAHOMA CITY -- Investors fear

UnitedHealth

(UNH) - Get Report

could be on shaky ground in its upcoming earnings report.

Last month, when

WellPoint

(WLP)

and

Humana

(HUM) - Get Report

were forecasting dramatic first-quarter shortfalls, UnitedHealth chose a more measured approach.

At the time, the company said it was maintaining its forecasts, while it promised to monitor some key trends, starting with enrollment in its core health insurance plans. The company also warned about possible pressures on its first-quarter earnings results, which are due Tuesday.

Some experts are already bracing for some bad news. Indeed, Bear Stearns analyst John Rex slashed his outlook for UnitedHealth more than a week ago. His first-quarter forecast, which calls for profits of 78 cents a share, is a penny below the current consensus estimate.

For its part, UnitedHealth has promised to deliver first-quarter profits of 82 cents to 84 cents a share. If anything, the company tends to beat its own projections. But this time, Rex fears that a rare miss could be on the way.

Rex is somewhat cautious about the entire sector and has a market-weight rating on the industry.

"We continue to see a modest downward bias to the earnings outlook for the group, a factor that will still likely weigh somewhat on the stocks," he wrote earlier this month. "We do not believe that the downward bias is dramatic in scale, but enough to likely keep multiples stalled at these levels for the next number of months."

Ultimately, he said, "the question persists as to whether underlying medical cost trend is at an inflection point and reaccelerating. While we do not see definitive evidence that corroborates that this is indeed the case, with most companies edging down their earnings outlooks -- even if for differing reasons -- it is a factor that will be very difficult to take off the table for now."

UnitedHealth could be worse off than others in the sector. Its core commercial division has seen costs rise -- and enrollment weaken -- when some others have not.

In addition Rex is worried about the company's Medicare Advantage business this time around.

"We now look for only very modest MA organic enrollment in 2008, up about 20,000 lives" excluding acquisitions, he said. "Current company guidance looks for about 150,000 adds, though we presume that UNH will reduce that view with the 1Q report."

Still, Rex expects UnitedHealth to outperform the rest of the group. His firm has investment banking ties to the company.

UnitedHealth investors hope for the best as well. They pushed the company's stock up 1.5% to $37.80 on Monday in anticipation of good news.

Last month, UnitedHealth promised to "actively monitor" several important trends that could impact its performance.

For starters, the company pledged to keep a close eye on its enrollment numbers. Poor service has hurt the company's lucrative commercial business in the past.

Bad news continued to roll in during the first quarter. In mid-February, for example, UnitedHealth ranked last among health insurers in a key survey measuring customer satisfaction, with a score that was even lower than

Wal-Mart

(WMT) - Get Report

.

By then, Goldman Sachs analyst Matthew Borsch had heard some troubling reports about UnitedHealth already. Early this year, complaints about the company kept surfacing during one-on-one meetings that Borsch hosted with some of the nation's largest employers.

"UnitedHealth received the most negative comments -- by far -- from the employers we spoke to," Borsch wrote in mid-January. "Although some employers were satisfied, four (of the 12 surveyed) reported having eliminated UnitedHealth recently from their benefit offerings or planning to do so in the near future."

Borsch has a neutral rating on UnitedHealth's stock. His firm has investment banking ties to the company.

Meanwhile, Borsch has observed some possible weakness in UnitedHealth's Medicare business as well. While some of the company's rivals have posted strong double-digit gains in MA enrollment so far this year, Borsch's estimates show, UnitedHealth has seen its own MA business barely grow at all.

Of course, critics would like to see that lucrative business disappear completely. Just this month, several organizations, including the AFL-CIO and Families USA, urged Congress to scale back subsidies for private MA plans.

The Medicare Payment Advisory Committee recently estimated that private MA plans cost 13% more than traditional Medicare but, in some cases, deliver poorer results. The group, which formally advises Congress on Medicare matters, has started pushing for sweeping reforms as a result.

"With each passing year, the Commission's concern about Medicare's long-term sustainability grows," the group wrote in March. "Time, therefore, is of the essence."

Borsch, for one, seems resigned to looming MA cuts. He remains cautious on most of the health insurance group in the meantime.

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