Yesterday, megacap health insurer UnitedHealth (NYSE: UNH) reported a 24% year-over-year increase in its Q2 earnings per share. On a consolidated basis, the company also reported favorable improvements in many of its key financial metrics. However, shares closed 3.2% lower than Thursday's opening price, as Wall Street raised questions about the company's medical-care ratio -- which measures health-care costs as a percentage of premiums and fees -- and overall pricing environment.
Among the good news for UnitedHealth shareholders, the company's Q2 earnings from operations increased by 21% year over year, on a 6% improvement in revenue. On a consolidated basis, the company saw slight improvements in its medical care and operating costs as a percent of revenue ratios. These welcome trends enabled management to slightly raise the upper end of its forecasted range for the company's full-year earnings.
The concerns dragging down UnitedHealth's shares stem from the company's announcement that its health-care services segment had a medical-care ratio of 81.8% in Q2, compared to a ratio of 81.2% in Q1. This unfavorable trend led the company to increase its forecast for its full-year medical-care ratio to a range of 81.5% to 82%, from 79.9% last year. The strength of the company's Medicare business has also led some critics to worry that this segment's performance may obscure indications of tightening margins from the provider's commercial business.
UnitedHealth management maintains that the insurer can still price its premiums profitably, and that it hasn't been pinched by a competitive pricing marketplace or rising health-care costs. If so, yesterday's plunge in UnitedHealth shares might spell opportunity for value investors. Fools not entirely sold on this point might prefer to wait and see whether pricing issues persist across the industry. Plenty of data on that question is on its way; WellPoint (NYSE: WLP) and Aetna (NYSE: AET) both report their earnings next week, with Cigna's (NYSE: CI) numbers coming the week after.
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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
