UPDATE 4-UnitedHealth profit beats, as drug unit shines

* Q3 EPS of 89 cents vs 76 cents analyst estimate

* Medicare Advantage membership rises by 290,000

* Sees 2009 EPS of about $3.15, high end of prior view

* Sees 2010 earnings at $2.90-$3.10 per share

* Shares rise 5.5 percent (Adds analyst, company comments, details)

By Lewis Krauskopf

NEW YORK, Oct 20 (Reuters) - UnitedHealth Group Inc's (UNH.N) quarterly profit easily topped estimates on Tuesday as growth in its Medicare plans for seniors and drug benefit unit offset drags from the weak economy and the H1N1 flu.

Lower-than-expected medical costs, administrative expense controls and a tax gain also helped the largest U.S. health insurer by market value.

Shares rose 5.5 percent, even as UnitedHealth told analysts on a conference call it expected earnings to fall next year. The insurer expects continued enrollment losses for its employer-sponsored plans from the weak economy and faces lower government reimbursement for Medicare plans.

"They beat the earnings expectations by a significant amount," Edward Jones analyst Steve Shubitz said. "However, in 2010 you're going to see a very challenging year."

As the third-quarter earnings season starts, stock valuations of UnitedHealth and other health insurers remain at rock-bottom levels amid worries the health reform overhaul under debate in Washington will cripple future profits.

"In normal times, we would expect a strongly positive stock reaction to these results," Goldman Sachs analyst Matthew Borsch said in a research note.

"However, the stock reaction here may be somewhat muted given uncertainty over the longer-term outlook as the push for health reform legislation continues in Congress."

UnitedHealth said net income rose 13 percent to $1.04 billion, or 89 cents per share, from $920 million, or 75 cents per share, a year earlier.

Analysts on average expected 76 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose about 8 percent to $21.7 billion, above the $21.56 billion analyst estimate.

Profit at the company's prescription drug benefit business more than doubled to $196 million, helped by higher prescription volume, gains in mail-order drug sales and a shift to higher-margin generics.

Revenue rose 19 percent at its Ovations business serving seniors to $7.9 billion. Its Medicare Advantage plans added 290,000 members to stand at 1.77 million at the end of September.

Total membership stood at 31.98 million at the end of September, down about 3 percent from a year earlier.

Since the end of June, its UnitedHealthcare commercial business serving employers declined by 275,000 members, including 195,000 in its more lucrative plans for which it assumes full insurance risk.

Like rivals, Minneapolis-based UnitedHealth said job cuts at its customers stemming from the weak economy was the overriding factor in the enrollment declines.

Medical costs accounted for 84.6 percent of premium revenue in the commercial business, compared to 83.8 percent a year ago. The company cited higher medical costs from the H1N1 flu and for benefits to people in so-called COBRA plans who have lost their jobs and tend to use more medical services.

Overall, 82 percent of premiums were spent on medical costs, compared to 81.7 percent a year ago, but still lower than the 83 percent expected by analysts at Goldman Sachs and Sanford Bernstein.

Operating costs as a percentage of revenue fell to 14.5 percent from 15 percent a year ago. A favorable resolution of state income tax items boosted earnings by 3 cents per share, the company said.

UnitedHealth projected 2009 earnings of about $3.15 per share, compared to its previous view of $3 to $3.15. Analysts expect $3.09.

For next year, the company projected earnings of $2.90 to $3.10 per share on revenue of around $89 billion. Analysts were looking for earnings $3.16 per share on revenue of $91.5 billion.

"We expect 2010 to be a somewhat more difficult year than 2009," Chief Executive Officer Stephen Hemsley told analysts on a conference call.

UnitedHealth shares rose $1.36 to $26.28 in morning trading on the New York Stock Exchange. Through Monday, they had fallen 6 percent this year, underperforming a 3 percent rise for the S&P Managed Health Care index .GSPHMO of large health insurers. (Reporting by Lewis Krauskopf; Editing by Derek Caney, Dave Zimmerman)