07/18/2013 06:23 EDT | Updated 09/17/2013 05:12 EDT

UnitedHealth 2Q profit rises as enrolment improves, but executives caution on Medicare cuts

MINNETONKA, Minn. - UnitedHealth Group Inc.'s second-quarter net income rose almost 8 per cent, buoyed by steady enrolment growth and slower-than-expected use of health care services.

The nation's largest health insurer's earnings topped Wall Street estimates on Thursday, and it raised the low end of its full-year earnings forecast. The company's stock jumped nearly 6 per cent.

But company executives continued to warn that federal cuts to the Medicare Advantage program would put pressure on the company in 2014 and beyond.

When private insurers first entered the Medicare program in the late 1990s, federal officials widely assumed companies would lower costs with their managed-care strategies. But the privately run Medicare Advantage programs ultimately grew more expensive than the traditional government-run program. The Obama health care overhaul aims to equalize funding levels for Medicare Advantage and the government program.

UnitedHealth is the first major health insurer to report earnings every quarter. As the industry leader based on revenue, many see it as a bellwether for other insurers. Its shares rose $3.52, or 5.3 per cent, to $69.73.

The Minnetonka, Minn., company earned $1.44 billion, or $1.40 per share, in the three months ended June 30. That's up from $1.34 billion, or $1.27 per share, a year earlier.

The company beat the average beat the average Wall Street estimate by 15 cents, with analysts polled by FactSet expecting $1.25.

Despite that performance, the company only increased the low-end of its earnings guidance, predicting full-year earnings of $5.35 to $5.50 per share. That was up from $5.25 to $5.50.

"While the second quarter results were solid, the modest guidance increase likely tempers upside to UnitedHealth," Jefferies analyst David Windley said in a research note.

Still, investors sent the company's stock up $4.32, or 6.5 per cent, to close at $70.55 Thursday.

UnitedHealth CEO Stephen Hemsley told analysts the company will work to maintain its presence in the Medicare Advantage market, even as the federal government curbs payments for the plans.

"We are focused on operating that program to its maximum potential and serving as many seniors as we can ... recognizing the funding pressure that is ongoing," Hemsley told analysts.

UnitedHealth is the nation's largest provider of Medicare Advantage plans, which offer government-subsidized coverage for elderly and disabled people. The insurer has nearly 2.9 million people enrolled in the plans, and they brought in about 20 per cent of its revenue last year.

Funding for Medicare Advantage plans will be cut as part of the health care overhaul, which aims to provide insurance coverage to millions of uninsured Americans.

UnitedHealth said it would keep the plans profitable by trimming benefits, changing providers and exiting some parts of the U.S. market. UnitedHealth said Thursday it would eliminate plans affecting about 5 per cent of its members, or about 150,000 the company's Medicare Advantage enrollees. Most of those patients would still have access to other types of UnitedHealth plans.

"We are exiting certain markets, we're exiting certain plans, we're narrowing our networks across virtually all of the markets," Hemsley said. "Those are not good things for American seniors who engage in these benefits."

The company's overall enrolment increased by 3 million people, with a total enrolment of 45 million for the quarter.

Revenue rose 12 per cent to $30.41 billion from $27.27 billion, but missed the $30.52 billion in revenue that Wall Street called for.

The Optum segment, which provides services such as technology outsourcing and pharmacy benefits management, reported $8.8 billion in revenue, a 21 per cent increase. The company has touted that segment as an important source of future growth.

UnitedHealth still anticipates full-year revenue of about $122 billion. Wall Street foresees earnings of $5.43 per share on $122.48 billion in revenue.