UnitedHealth Group (UNH)

You can not built greatness with cost cutting.

UnitedHealth Group Inc., the largest U.S. health insurer, cut its earnings forecast for the second time this year ( July 2) and said it would trim 4,000 jobs as membership fell and expenses increased.

UnitedHealth also said today it will pay $895 million to end a class-action lawsuit over grants of stock options to executives. The Minnetonka, Minnesota company rose the most in 5 years in New York trading on speculation the worst news is past, and the shares of other insurers increased as well.

The change in the forecast for full-year adjusted earnings, to $2.95 to $3.05 a share from $3.55 to $3.60, was unrelated to the legal costs, the insurer said. UnitedHealth previously reduced its earnings projection in April as sales declined and profits in Medicare-backed plans for the elderly decreased. The company today said it will pay out a higher percentage of premium revenue on care in 2008 than it predicted in April.

Low profits: For such an established company, United should have a better profit margin. It does not effectively leverage its size, or else it would outperform its smaller peers like CIGNA Corporation (CI) and Aetna (AET).

Ingenix and other UNH subsidiaries face a lawsuit filed by New York State Attorney General Andrew M. Cuomo ^[1]. Cuomo is "conducting an industry-wide investigation into a scheme by health insurers to defraud consumers by manipulating reimbursement rates. At the center of the scheme is Ingenix, Inc., the nation’s largest provider of healthcare billing information, which serves as a conduit for rigged data to the largest insurers in the country."

Management Turmoil: With the resignation of Dr. McGuire, the backdating scandal cast the executive management of United into turmoil. The bottom line does not benefit when companies lose their CEOs, and it is a poor sign that United engaged in shady, illegal maneuvers.

Government Uncertainty: United's income depends in large part on the existence of government insurance programs. For now those programs support private insurance, but there is no guarantee that in the future, the government will not create its own insurance programs itself.