UnitedHealth Earnings Rise 21% as Medical Costs Ease

Insurer UnitedHealth Group Inc., which is in the process of acquiring PacifiCare Health Systems Inc. of Cypress to augment its position in the Medicare market, reported a 21% rise in third-quarter earnings Friday.

Minnetonka, Minn.-based UnitedHealth credited the increase to membership gains and lower-than-expected medical costs. The company forecast that strong profit growth would continue through 2006 at a clip of at least 15%.

UnitedHealth predicted that the coming Medicare prescription drug benefit would add 2 million to 3 million new members to its rolls next year, potentially boosting 2006 earnings by 5 cents a share. The company said membership increased to 11.4 million, a gain of 265,000 in the quarter.

Net earnings rose to $842 million, or 64 cents a share, from $698 million, or 52 cents, a year earlier. The results were a penny a share better than the average forecast by analysts polled by Reuters Estimates.

Third-quarter revenue rose 15% to $11.3 billion, in line with analysts’ estimates.

Goldman Sachs analyst Matthew Borsch said UnitedHealth’s results boded well for the sector. As the first of the big managed-care companies to report earnings, the company is considered a bellwether.

Shares of UnitedHealth rose $2.23 to $56.43. News of its results lifted shares of rivals WellPoint Inc., Cigna Corp., Aetna Inc. and Humana Inc.

“We expect another strong back half for managed care,” Borsch said in a research note. “Continued slowing in medical cost trends should drive upside to projected earnings, setting the stage for favorable industry fundamentals through mid-2006.”

UnitedHealth is set to grow after the company completes its $8.1-billion acquisition of PacifiCare. UnitedHealth said it expected to close the deal by year-end or early in 2006.

Borsch said strength in the quarter was driven by a lower medical cost ratio, a key measure of the company’s effectiveness in taming costs for doctors, hospitals and pharmaceuticals.