UPDATE 4-UnitedHealth’s wary 2011 view mars Q3 profit beat

* Q3 EPS $1.14 vs $0.84 Wall Street estimate

* Sees 2010 EPS $3.85-$3.95 vs $3.40-$3.60 previously

* Sees lower earnings next year

* Says needs clarity on reform before specific 2011 view

* Shares fall 2.6 percent
(Rewrites, adds company, analyst comments on 2011)

By Lewis Krauskopf

NEW YORK, Oct 19 (BestGrowthStock) – UnitedHealth Group Inc (UNH.N: )
on Tuesday provided a cautious view of its prospects next year,
including likely lower profit, as it grapples with new
healthcare reforms, overshadowing far better-than-expected
third-quarter results.

The largest U.S. health insurer held back from providing a
specific 2011 forecast because new rules governing spending on
medical care have yet to be finalized. But UnitedHealth,
considered an industry bellwether, said it expected “some
level” of reduction in operating earnings and net earnings per
share.

After rising in premarket trading on the strong quarterly
results, shares were down 2.6 percent in morning trading
following comments by Chief Executive Officer Stephen Hemsley
about next year.

“Given this external environment and its uncertainties,
….our tone as we enter 2011 is appropriately measured,”
Hemsley told analysts on a conference call.

While the projection for lower earnings was likely hurting
the stock, those who follow the industry should not be
surprised considering the new laws, CRT Capital analyst Sheryl
Skolnick said.

“Analysts and investors who are close to the story are not
only not surprised by this, I think they’re probably relieved
that management isn’t telling fairy tales,” Skolnick said.
“It’s a very prudent statement of recognition of economic
realities and regulatory uncertainties.”

The analyst also noted the weaker overall market on Tuesday
could be weighing on the company’s shares.

The 2011 outlook took prominence for investors over the
strong quarterly beat, which was driven by UnitedHealth’s
health plan members using fewer healthcare services.

Third-quarter net income rose to $1.28 billion, or $1.14
per share, from $1.04 billion, or 89 cents per share, a year
ago. Analysts on average were expecting 84 cents per share,
according to Thomson Reuters I/B/E/S.

UnitedHealth’s revenue rose 9 percent to $23.7 billion,
ahead of the $23.3 billion estimate. The company also raised
its 2010 profit outlook.

AWAITING SPENDING RULES

UnitedHealth and other insurers are awaiting final
regulations that will govern how much the companies must spend
starting next year on medical care as opposed to administrative
expenses and profits.

A key group of state insurance commissioners is expected to
issue final recommendations this week on rules for the spending
ratio, known as the medical loss ratio.

For the quarter, the company spent 80.1 percent of its
premium revenue on medical care, down from 82 percent a year
ago.

Wall Street often sees such declines in the medical loss
ratio as a promising sign for profitability. But companies may
have to give rebates if their ratios come in too low next year,
erasing gains for the bottom line.

UnitedHealth cited a lower use of healthcare services that
also boosted industry results earlier this year.

Consumers whose plans lead them to face higher
out-of-pocket costs are delaying care, said Wedbush Securities
analyst Sarah James. The decline in healthcare service costs
also stems from lower expense from to the H1N1 flu compared
with a year ago, James said.

“It looks like a strong quarter, and the outperformance was
driven by lower-than-expected medical expenses,” James said. “A
longer-term trend is from the continued lower hospital
utilization, which is something that we’ve seen across the
companies every quarter this year.”

Revenue in UnitedHealth’s business serving Medicare and
other plans for the elderly grew 11 percent to $8.8 billion,
while its unit serving low-income Medicaid recipients rose 29
percent to $2.7 billion. Both units added significant amounts
of enrollees.

Its total membership stood at 32.7 million at the end of
September, up about 2 percent.

With the new law bringing more regulations over its core
health benefits business, UnitedHealth has announced several
recent acquisitions to boost its presence in health services,
such as medical compliance or software for hospitals.

Quarterly revenue in its Ingenix business providing
healthcare information and other services rose 23 percent to
$592 million.

UnitedHealth forecast 2010 earnings in the range of $3.85
per share to $3.95 per share, up from its previous view of
$3.40 to $3.60 per share. Analysts were projecting $3.60.

UnitedHealth also raised its projection for full-year
revenue to nearly $94 billion, up from about $93 billion
before.

UnitedHealth’s shares fell 94 cents to $35.31 in morning
trading on the New York Stock Exchange. Through Monday,
UnitedHealth shares have risen about 19 percent this year,
outperforming a 13 percent rise for the Morgan Stanley
Healthcare Payor index (.HMO: ) of health insurers.
(Reporting by Lewis Krauskopf. Editing by Robert MacMillan,
Dave Zimmerman)

UPDATE 4-UnitedHealth’s wary 2011 view mars Q3 profit beat