August 18, 2009 / 3:57 PM / in 10 years

UnitedHealth Medicare plan keeps Street on edge

NEW YORK (Reuters) - Wall Street is bracing for an aggressive strategy from UnitedHealth Group Inc (UNH.N) that stands to shake up the private market for providing coverage under Medicare, the U.S. government program for the elderly.

UnitedHealth is expected to increase its lead next year in providing Medicare Advantage plans run by private insurers when other companies may retreat in the face of anticipated falling reimbursement.

The fear from investors is that by providing generous benefits or lower premiums, UnitedHealth, the largest health insurer by market value, will dramatically shrink profit margins and undermine its 2010 earnings.

“It is adding an element of risk,” CRT Capital analyst Sheryl Skolnick said.

“It’s drawing a bright line and saying, ‘We are taking a stand that will garner us significant market share, and we’re going to cross our fingers and our toes and hope the government does not create a margin squeeze that makes that growth unprofitable.’”

Some question the wisdom of expanding in Medicare Advantage when President Obama may be looking for Medicare savings by whacking subsidies for insurers.

But after earning jeers initially from many on Wall Street, some analysts say UnitedHealth is making a savvy move. Despite the uncertainty, Medicare has been a source of growth for health insurance companies, as their primary business of providing employer-based coverage has declined.

UnitedHealth’s stock already slumped after it revealed hints about its Medicare positioning, so some analysts say it could outperform in the coming months should the fallout for next year not be as bad as feared.

“It’s a short-term hit in 2010,” Sanford Bernstein analyst Ana Gupte said. “Long term, it’s a good strategy. Investors that have a more near-term approach may not be pleased, but for those that are in it for the longer haul it’s a better strategy for the company.”

UnitedHealth also may be making a smart political move by demonstrating its commitment to Medicare even as the government squeezes reimbursement, said Scott Richter, a portfolio manager for Fifth Third Asset Management.

“I think it’s a little bit of a political chip with Washington,” Richter said.

“The more lives you control at the end of the day, the more power you have down the road to negotiate even if it’s with the government, so I think that could potentially be part of their plan politically as well.”

UnitedHealth reported 1.74 million Medicare Advantage members at the end of June. Its strategy could boost that enrollment by as much as 10 percent, Richter said.

UnitedHealth is keeping quiet about its bidding strategy as the government reviews the bids.

Analysts predicted UnitedHealth’s strategy after comments its executives made at an investor conference in June.

The complicated scenario stems from the company factoring in a reduction in its costs through lower doctor payments from Medicare. By assuming lower costs than rivals, UnitedHealth will offer more attractive plans, analysts say.

Grabbing market share at the expense of lower profit margins is generally thought to be a devil’s bargain in the health insurance industry.

Shares of the largest health insurer by market value have underperformed top rival WellPoint Inc WLP.N this year despite UnitedHealth’s solid results so far in 2009.

UnitedHealth is perhaps the most diverse of the major health plans. Aside from Medicare and commercial plans for employers, it is the largest provider of health plans under the Medicaid program for low-income Americans and offers data, consulting and financial services.

The Medicare issue has distracted investors from the Minnesota company’s strong operational performance, said David Heupel, a portfolio manager at Thrivent Investment Management.

“It’s focused the story away from what I think the focus should be, which is United regaining their preeminence as one of the premium managed care companies,” Heupel said. “Right now you’ve got a short- to intermediate-term cloud over that because you just don’t know how 2010 could look.”

A fuller picture will emerge later this year, when bids are made public and companies provide 2010 earnings forecasts.

Stifel Nicolaus analyst Thomas Carroll views UnitedHealth’s strategy as a deliberate plan to grow market share and thinks it will not be “a big drastic hit to margins next year.”

“If you’re going to be a big player at the table for the next decade, you have to have Medicare exposure,” Carroll said. “That is the only population in the country that is growing.”

Reporting by Lewis Krauskopf. Editing by Robert MacMillan

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