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UnitedHealth Revenue Miss

Shares sink despite generally solid results.
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UnitedHealth (UNH) - Get UnitedHealth Group Incorporated Report sank early Thursday after the big health insurer came up light on revenue and predicted that medical costs would rise in 2007.

Minneapolis-based UnitedHealth beat first-quarter financial targets and reaffirmed guidance for the year. For the quarter ended March 31, earnings rose to $927 million, or 66 cents a share, from the year-ago $891 million, or 63 cents a share. Revenue rose to $19.05 billion from $17.58 billion a year earlier.

Excluding stock option costs, latest-quarter earnings were 74 cents a share. Analysts were looking for a 71-cent profit on sales of $19.37 billion.

"Our first quarter results demonstrate the value of building and operating a diverse group of businesses with participation in a broad expanse of distinct end markets within health care," said CEO Stephen Hemsley. "In that regard, we are pleased and honored to renew and expand our relationship with AARP, the pre-eminent organization serving people over age 50."

UnitedHealth said it expects to make 80 cents to 82 cents a share for the second quarter and $3.42 to $3.46 for the year. Analysts were looking for 81 cents and $3.42.

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But the company also raised its projected medical care ratio, representing the proportion of premium dollars paid out for patient care.

UnitedHealthcare said its first quarter 2007 medical care ratio of 81.2% compares to ratios of 79.4% and 80.4% in the first quarter and fourth quarter of 2006, respectively. The increases relate almost exclusively to changes in medical cost reserves (and related underlying medical cost items).

First-quarter 2006 included $90 million in favorable development of 2005 cost estimates. First-quarter 2007 includes unfavorable reserve development of approximately $100 million related to the fourth quarter of 2006, composed of approximately $30 million in unusual, nonrecurring items and $70 million related to items that recur on a full-year, annualized basis, such as increased fourth-quarter benefit usage in high deductible policies.

Reflecting the recurring costs, UnitedHealthcare continues to affirm its estimated cost trend for 2007 within the range of 7.5%, plus or minus 50 basis points, and continues its policy of appropriately balanced price increases.

Based on these items, UnitedHealthcare has increased its outlook for the 2007 full-year medical care ratio by 80 basis points over 2006 full-year results. UnitedHealthcare estimates its full-year 2007 medical care ratio to be in the range of 80.5%, plus or minus 50 basis points.