Insurer UnitedHealth Group Inc (UNH.N) on Thursday signaled that pressures on its health plans would not ease anytime soon as the government reins in reimbursement for Medicaid and Medicare and tough competition persists among plans serving employers.
Shares of the largest health insurer by market value fell more than 3 percent after the comments to Wall Street, overshadowing UnitedHealth's higher-than-expected 6 percent rise in quarterly earnings and raised full-year profit forecast.
It was the first report from a health insurer since the U.S. Supreme Court late last month upheld President Barack Obama's healthcare law, which more tightly regulates the industry and adds new fees while also adding millions of potential new customers by expanding coverage to the uninsured.
Chief Executive Officer Stephen Hemsley told analysts on a conference call that there "continues to be more downward than upward pressure across the healthcare landscape."
"We expect this environment to prevail for some time, due to the employment malaise and imminent regulatory changes," he said.
Hemsley pointed to fiscal constraints on state governments that will squeeze Medicaid plans for the poor and federal government changes to the Medicare Advantage program will hurt reimbursement rates. Executives on the call also raised concerns about aggressive competition among plans serving employers.
Shares of rivals WellPoint Inc WLP.N and Aetna Inc (AET.N) each were down about 2 percent.
UnitedHealth's commentary contrasted with what analysts roundly praised as strong second-quarter quarter results from the company, which is considered a bellwether because of its size and diversity of health plans.
"If you called me yesterday and said, 'Here is what they were going to do; what do you think?', I would have been dancing in the halls because it was about as good a quarter as I could have expected," said Thrivent Investment Management analyst David Heupel.
UnitedHealth shares tend to trade down on days when the company reports earnings, Heupel and other analysts said.
The company also has outperformed its rivals this year, and before Thursday traded at a more than 35 percent premium to WellPoint and Aetna, so investors may have been looking for more to support the valuation.
Investors have also been wary about the industry after a spotty first-quarter earnings season in which several top companies - though not UnitedHealth - reported profits short of analysts' estimates.
UnitedHealth's second-quarter net income rose to $1.34 billion, or $1.27 per share, from $1.27 billion, or $1.16 per share, a year earlier. Analysts on average expected a profit of $1.19 per share, according to Thomson Reuters I/B/E/S.
Revenue grew 8 percent to $27.3 billion.
Enrollment in UnitedHealth's plans stood at nearly 35.9 million at the end of June, up about 5 percent. Enrollment increased in its Medicare and Medicaid plans as well as its fee-based plans for employers for which it administers services.
Investors have been encouraged by UnitedHealth's broad range of health plans, including its big business in Medicaid and Medicare, and a diverse profit stream from other healthcare service offerings, such as pharmacy benefits and data and analytics products.
In the quarter, the company spent 81.3 percent of its premiums on medical claims, compared with 81.4 percent a year ago. That was a touch lower than the 81.8 percent expected by Wells Fargo analyst Peter Costa.
Americans' low use of healthcare services has proved to be a boon for health insurers over the past two years by reducing their medical claim costs and increasing profits. But investors have been bracing for utilization to start rising again.
UnitedHealth forecast full-year earnings of $4.90 to $5.00 per share, higher than its previous outlook of $4.80 to $4.95. Analysts were expecting $4.99.
This was the second time the company boosted its 2012 forecast.
UnitedHealth expects revenue of $110 billion for 2012.
The company's shares were down 3.7 percent at $54.25 in afternoon trading on the New York Stock Exchange. For the year, they are up 7 percent compared with a 1 percent decline in the S&P Health Care index of large insurers .GSPHMO.
(Reporting by Lewis Krauskopf in New York; Editing by Lisa Von Ahn, Bernadette Baum and Kenneth Barry)