UnitedHealth States 2011 Guidance - Analyst Blog

In a brief release yesterday, US health insurer UnitedHealth Group (UNH) announced its earnings expectations for fiscal 2011 in the range of $3.50 to $3.70, which is lower than the 2010 guidance of $3.85 to $3.95.

The Minnetonka, Minnesota-based insurer, however, has come out with revenue guidance in the range of $99 − $100 billion for fiscal 2011, higher than expected revenues of $94 billion for fiscal 2010.

Though the second largest insurer (on the basis of sales) has scaled up its revenue guidance, the lowering of bottom line comes on the back of higher minimum medical loss ratio (MLR), which UnitedHealth will have to maintain as mandated by the Health Care Act as well as the freezing and gradual reduction of payments to Medicare Advantage services. 

The Health Care Act, which came into effect in March 2010, requires health insurance companies to maintain an MLR of at least 85% of large group premiums and 80% of small group and individual/family premiums. The MLR measures the share of premiums that an insurer actually spends on delivering care to policyholders, rather than on administrative costs, marketing, and profits. According to the new Act, insurance companies will have to report how they spend the premium dollars they collect from their customers. If they spend too much on administrative costs and profits, they will have to give some of that money back to their customers.

Moreover, UnitedHealth is also expected to suffer from a cutback in the Medicare Advantage program as it costs the government substantially more per person than regular Medicare. Another carrier that will be strongly affected by the Medicare Advantage subsidy cut will be Humana Inc. (HUM), which is considered to have the highest exposure among the major insurers to the program. 

Though a pulling down of earnings estimates is generally not a happy sign for the investing community, the share price movement of UnitedHealth signals otherwise. The stock gained close to 3% or $1.05 during the day of news announcement. Analysts and investors view the expectation as conservative, intended to reserve room for earnings beat and raising guidance. The Zacks Consensus estimates earnings of $3.63 and revenues of $99.6 billion for fiscal 2011.

UnitedHealth carries a Zacks #3 Rank, which translates into a Hold Recommendation for the short term (1−3 months). Also considering industry trends and the gradual unfolding of the health care reform laws, we carry a long term Neutral rating on the shares.

 
HUMANA INC NEW (HUM): Free Stock Analysis Report
 
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
 
Zacks Investment Research