UnitedHealth Group announces lower profit outlook

UnitedHealth Group on Wednesday lowered its earnings guidance because of reduced commercial businesses and higher-than-expected Medicare-related costs and said it would restructure the company with a greater focus on regional coverage, the Chicago Tribune reports (Chicago Tribune, 7/3).

The insurer said that profits would drop about 16% from earlier estimates (Forster, St. Paul Pioneer Press, 7/2). Overall, the company expects earnings to be cut by about $1.1 billion, including $400 million related to problems in its commercial business and $500 million related to problems with its Medicare prescription drug benefit plan.

UnitedHealth CEO Stephen Hemsley said, "There are other elements which combined to negatively impact our earnings expectations by a further $200 million," adding, "Behavioral health utilization trends are up sharply this year due to the greater use of services directly related to the troubled economic environment as well as due to parity benefit changes in New York." UnitedHealth officials have said that in response to growing costs, more people are declining health care coverage or are enrolling in plans with lower premiums that have either fewer benefits or higher deductibles.

In addition, the company expects to lose 800,000 people from fully insured plans this year. The company said it has been forced by competition to discount premiums more than expected for new and renewed customer accounts. UnitedHealth spokesperson Don Nathan said, "The current economic environment means that potential customers are much more price sensitive," adding, "The market for commercial employer-sponsored insurance has not been increasing, it's been contracting."

In a note to investors on Wednesday, Goldman Sachs analyst Matthew Borsch wrote that UnitedHealth had been more direct that other insurers in acknowledging the effects of competition on earnings across the industry. Borsch wrote, "There is no easy fix here: We believe industry margins will move lower in 2009-2010" (Snowbeck, St. Paul Pioneer Press, 7/2).

The company said it would cut 4,000 jobs as part of its restructuring plan (Dunbar, AP/Atlanta Journal-Constitution, 7/2).

Settlement

Also on Wednesday, the California Public Employees' Retirement System said that it and other pension funds have negotiated a $895 million settlement in a class-action lawsuit against UnitedHealth over stock-option backdating revealed in 2006, the Los Angeles Times reports (Lifsher, Los Angeles Times, 7/3).

CalPERS sued UnitedHealth in 2006 after the Wall Street Journal listed the health insurer among companies likely involved in stock-option backdating (Forster, St. Paul Pioneer Press, 7/2). CalPERS has about 1.5 million members, and its investment portfolio is valued at about $240 billion (AP/San Francisco Chronicle, 7/3). The pension fund holds about 4.9 million UnitedHealth shares, which are valued at about $127 million (Los Angeles Times, 7/3).

UnitedHealth agreed to the settlement to avoid "potentially costly and protracted litigation and allows us to continue to focus on providing Americans with high-quality, affordable health care solutions," Thomas Strickland, chief legal officer at UnitedHealth, said (Forster, St. Paul Pioneer Press, 7/2). The settlement, which also contains corporate governance provisions, must be approved by the CalPERS and UnitedHealth boards and the U.S. District Court in Minnesota where the lawsuit was filed (Los Angeles Times, 7/3). In addition to the large class-action settlement involving CalPERS, UnitedHealth also reached a proposed $17 million settlement to resolve a lawsuit related to the Employee Retirement Income Security Act (Forster, St. Paul Pioneer Press, 7/2).