UnitedHealth's Results Are Stable, But For How Long?

(MoneyWatch)  UnitedHealth Group's third-quarter figures present a very stable picture of the giant insurance company. Despite the recession and a decline in employer-related membership in its health plans, United's revenues for the quarter ended Sept. 30 increased 8 percent to $21.7 billion from $20.2 billion for the year-earlier period. Operating income rose to $1.68 billion from $1.56 billion, keeping United's margin at 7.7 percent of revenues. Net earnings rose 12.5 percent to a shade over $1 billion, or 4.8 percent of volume.

According to United, "Strong overall third quarter performance in services businesses and continued operating cost management offset employment-related membership losses at UnitedHealthcare and mix changes driven by growth in lower margin government business at AmeriChoice, Ovations and OptumHealth."

There was a hidden message in this comment: AmeriChoice is United's Medicaid business and Ovations includes its Medicare Advantage and Part D drug plans. Apparently, state Medicaid cutbacks are hitting margins at AmeriChoice, which has been one of United's fastest-growing segments in terms of revenues. What is more puzzling is the decreased margins at Ovations: CMS has announced plans to cut payments to Medicare Advantage plans next year, but has not done so yet.

Counterbalancing the lower earnings in these sectors, United's Ingenix consulting and health information segment raised its earnings by 12 percent, compared to the year-earlier period, and earnings jumped 115 percent in United's pharmacy benefit management division, lifting its operating margin to 5.5 percent.

Meanwhile, United held the line on its medical cost ratio, which remained at about 82 percent year to year. The company did not realize any capital gains or losses in the third quarter, but it did use some of its cash hoard to buy back stock, a maneuver usually associated with an attempt to buoy up stock prices.

The ploy seems to have worked. Despite the recession and the threatening portents of healthcare reform, which have lowered the stock prices of some insurance companies, United's stock closed today at $25.96, very close to where it was a year ago. Interestingly, the share price of WellPoint, United's biggest competitor, has actually risen over the past year. WellPoint stock closed today at $46.04.

Healthcare reform is clearly a wild card for insurers. In the best of all possible worlds, the Obama Administration would get legislation mandating universal coverage, and insurance companies would reap the benefit of 46 million currently uninsured people (minus 7-8 million illegal immigrants) seeking insurance. But if Congress passes a bill that leaves many people uninsured, yet still requires health plans to take all comers, the insurance companies will be forced to raise premiums to a level that might hurt business. A robust public plan that requires physician participation -- a much less likely possibility -- could also harm the insurers. And the declining profitability of government business poses still another threat to them.

Considering all of these downsides, it's amazing that United has done as well as it has up to now. Next year could be much more difficult.