October 15, 2015 / 10:44 AM / 2 years ago

UPDATE 3-UnitedHealth profit modestly beats expectations; shares drop

(Adds comments, background, share price)

By Caroline Humer

Oct 15 (Reuters) - UnitedHealth Group Inc reported a slightly better-than-expected profit in the third quarter, helped by stable medical costs in its health plans, but failed to impress investors and its shares fell more than 2 percent in midday trading.

Analysts said shares in UnitedHealth, the largest U.S. health insurer and the first to report, have tended to fall following profit reports if the company has not well exceeded Wall Street expectations.

“It’s sentiment as opposed to true fundamentals,” said Mizuho Securities Managing Director Sheryl Skolnick.

In terms of medical costs being stable, the company said members were using medical services at the rates it had anticipated, a key indicator of whether the company will be able to meets its profit expectations.

The stock was down 2.4 percent at $119.10, after falling as much as 4 percent earlier. Shares of other insurers, like Anthem Inc and Aetna Inc, also fell, each shedding more than 1 percent.

Insurers’ shares have risen this year on expectations for industry consolidation. UnitedHealth has jumped about 20 percent, while Aetna surged more than 40 percent in the first six months of the year.

In July, Aetna announced plans to buy Humana Inc and Anthem said it would buy Cigna Corp. Aetna shares have fallen 15 percent since the deal was announced, while UnitedHealth has dipped 3 percent during that period, as the companies undergo antitrust scrutiny.

Investors are also focused on insurer medical costs, Skolnick said. The company said medical costs were as expected and it kept to its spending trend outlook, an indication that the use of medical services by patients was not increasing unexpectedly.

UnitedHealth said the percentage of premiums paid for medical services fell 80 basis points in the third quarter from the second quarter.

That medical loss ratio - a key metric in the industry that shows the proportion of premiums used for patient-care costs - increased over a year ago by 90 basis points to 80.6 percent due to higher spending in some Medicare Advantage plans for seniors and the disabled. That is aimed at meeting the government’s more stringent quality measures for these plans.

A shift in its business mix to more government business, where patient costs are higher compared to employer-based insurance, also contributed to the year-over-year decline in the medical loss ratio, the company said.

Costs for plans sold through the public exchanges created under President Barack Obama’s national healthcare reform pressured its operating margins, the company said. UnitedHealth sold individual plans in about two dozen states in 2015, up from just a few states in 2014.

The company plans to add 11 more states in 2015, and said it had priced its new 2016 plans to take these costs into account.

While the individual Obamacare health insurance business was a drag in 2015, UnitedHealth said it believed performance would be “strikingly” better in 2016.

Net profit attributable to UnitedHealth shareholders was little changed at $1.60 billion, or $1.65 per share, in the third quarter ended Sept. 30. Analysts had expected $1.64 per share, according to Thomson Reuters I/B/E/S.

Revenue rose to $41.49 billion, beating the average analysts’ estimate of $40.17 billion, helped by the acquisition of Catamaran, a pharmacy benefits manager. (Reporting by Caroline Humer in New York and Amrutha Penumudi in Bengaluru; Editing by Bernadette Baum)

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