(Reuters) - UnitedHealth Group Inc (UNH.N), the largest U.S. health insurer, reported a slight drop in fourth-quarter profit on Thursday as medical costs rose, but revenue increased more than 11 percent, helped by growth in its Medicare, care management, technology and international businesses.
The company outlined for the first time its plans to participate in the new health exchanges that will be established under the 2010 Affordable Care Act, which are expected to add millions to the ranks of the insured. Enrollment starts October 1 for coverage beginning in 2014.
The company said it expects to start by participating in 10 to 25 exchanges, perhaps more, though it has no firm commitment to that range.
“We will only participate in exchanges that we assess to be fair, commercially sustainable, and provide a reasonable return on the capital they will require,” the company’s chief executive, Stephen Hemsley, told analysts on a conference call.
The government-subsidized exchanges will offer insurance plans sold by private insurers such as UnitedHealth. So far 17 states and the District of Columbia have received conditional approval to establish their own exchanges.
Hemsley said he is skeptical that robust exchanges, whether state-based or federal, will be enrolling large numbers of individuals or groups as soon as enrollment begins.
“Our sense is that the initial consumer and small business response may be modest,” he said. However, he added, “we are committed to being ready.”
He said that over time the company is expecting an exchange category of coverage to become established as a new benefit category between Medicaid and the traditional commercial benefits market.
“We anticipate this category will have meaningful participation and that we will serve the majority of those markets,” he said.
UnitedHealth provides health care benefits through both employer and government-paid insurance plans and serves individuals and military members.
Fourth-quarter profit rose to $1.20 from $1.17 per share a year earlier, as outstanding shares fell. Net earnings were down 1 percent to $1.24 billion from $1.25 billion a year earlier. Revenue rose to $28.8 billion from $25.9 billion.
Analysts expected earnings of $1.19 per share and sales of $28.2 billion, according to Thomson Reuters I/B/E/S.
“There wasn’t a whole lot of surprises in there. They came in line with consensus on earnings,” said Jason Gurda, an analyst at Leerink Swann.
Optum, UnitedHealth’s growing health technology division, had revenue of $7.5 billion during the quarter and added $459 million to operating earnings.
The company said the unusual number of flu cases this year added $50 million in incremental costs, a figure analysts found reassuring.
“Overall, these results were strong, which should ease market concerns about the impact of the elevated flu season on the group,” said Michael Wiederhorn, an analyst at Oppenheimer, in a research note.
For 2013, UnitedHealth reiterated its forecast for revenue of $123 billion to $124 billion, up from $110.6 billion in 2012. It sees earnings per share rising to a range of $5.25 to $5.50, from $5.28 in 2012.
Analysts are expecting $5.55 per share on revenue of $121.11 billion.
Hemsley said that while the upper end of its guidance is “in the general zone with consensus” most gains will be seen in the second half of the year.
He said he expects the pace of acquisitions in 2013 to be more moderate than in 2012 and that the company’s earnings will grow in 2014.
“We do not view 2014 in a negative light,” he said, adding that he expects 2014, 2015 and beyond “hold the potential to be periods of positive growth and opportunity for our businesses.”
The company finished 2012 with 6 percent growth in membership to 83.7 million customers, it said.
Fourth-quarter medical costs rose, though a little less than it expected. The company’s medical loss ratio, or the percentage of premiums paid for medical expenses, was 80.5 percent. The Affordable Care Act requires insurers to spend at least 80 percent of premiums on medical care or provide a rebate to customers.
Hemsley said that UnitedHealth has nearly 70 percent of its 2013 business priced and that the markets, while competitive, have been better for the company than 2012.
UnitedHealth, which bought 65 percent of Brazil’s Amil Participacoes AMIL3.SA for $3.5 billion during the quarter, plans to increase its stake to 90 percent through buying shares from the public during the first half of 2013. The affiliate helped push international revenues to $1 billion in the fourth quarter, the company said.
The company’s shares ended 1.4 percent higher at $54.40 on the New York Stock Exchange on Thursday. Earlier they rose as high as $54.52, the highest level since Jan 2.
Reporting by Caroline Humer; Additional reporting by Toni Clarke in Boston; Editing by Alden Bentley, Gerald E. McCormick, Jeffrey Benkoe, Nick Zieminski and Tim Dobbyn