UnitedHealth Net Income Climbs 36%

Days after announcing plans to buy an Orange County-based competitor, UnitedHealth Group -- the nation’s No. 2 health insurer -- reported Thursday that its profit in the second quarter jumped 36%.

UnitedHealth, based in Minnetonka, Minn., said last week that it would pay $8.1 billion for Cypress-based PacifiCare Health Systems, the nation’s largest manager of Medicare plans for seniors.

The deal, subject to regulatory approvals, would add 3 million to UnitedHealth’s 22 million policyholders and an additional 11 million covered by PacifiCare’s dental and other specialty insurance plans.

UnitedHealth said net income for the three months ended June 30 grew to $809 million, or 47 cents a share, from $596 million for the same period last year. Revenue grew 28% to $11.1 billion.

Earnings were strong among nearly all of the company’s diverse business segments. Its health insurance unit saw a 29% rise in profit; Ingenix, the company’s healthcare data and software line, reported a 20% rise.

“We expect to continue to drive substantive gains in 2006, with earnings per share up at least 15%, excluding any contributions from the recently announced merger with PacifiCare, which will further strengthen our ability to meet customer needs in key geographies and end-market segments,” Chief Executive William H. McGuire said.

As a result UnitedHealth raised its projected growth in per-share earnings for 2005 to 25%, forecasting results of $2.45 to $2.47 a share, up from $2.42 to $2.45. Shares of the company rose 51% last year and are up this year about 20%, according to a report Thursday from Merrill Lynch & Co.

Despite the upbeat results, however, the company’s earnings beat Wall Street expectations by only a penny a share, and its stock dropped $1.15 to $50.25.

UnitedHealth was the first major medical insurer to report second-quarter earnings, so its results were closely watched, said Woody Small, president of Boston Private Value Investors, which has $850 million under management.

Part of UnitedHealth’s success comes from a long-term campaign to buy smaller companies in various markets around the country, Small said. The company added 1.5 million customers last year, for example, with its $4.6-billion buyout of Norwalk, Conn.-based Oxford Health Plans Inc.

“There’s a consolidation game going on right now, and they are a successful acquirer,” said Small, who said his firm did not own UnitedHealth shares. “They know what it is they are good at.”

At some point, however, UnitedHealth will run out of acquisition targets, he said.

“The problem for these companies is that they have made so much money in the past five years, they don’t know what to do with all the cash,” Small said. “You don’t want to make a foolish purchase.”

The company is not relying just on acquisitions to grow. It gained 700,000 members in the second quarter, mostly in specialized areas such as dental and vision plans.

Another plus in the quarter: The giant insurer’s costs are going down in part because UnitedHealth was able to negotiate cheaper contracts with hospitals and because some high-cost prescription drugs such as Vioxx have recently been pulled from the market, encouraging people to use lower-cost generic brands.

In addition, as employers shift more costs onto employees, such as with higher co-pays for office visits, workers may not go as often, lowering insurance costs, analysts said.

Coming in under expectations for medical costs added $120 million to second-quarter results, UnitedHealth said.