UnitedHealth Group Inc's first-quarter profit soared past Wall Street estimates on strong performance for its array of health plans, but fears that the new reform law will prevent such gains in the future undercut stock gains.

UnitedHealth spent far less in premium revenue on medical costs than a year before and lowered its forecast for that spending ratio for the year -- usually an encouraging sign to investors. However, such expenses will be regulated next year under the newly passed health overhaul, which may effectively cap insurer profits.

These gains aren't sustainable, said Tim Nelson, a healthcare analyst with First American Funds. These stocks are pricing on 2011 earnings, which are going to be significantly impacted by healthcare reform.

While hailing the company's strong overall results, some analysts also said UnitedHealth might draw unwanted attention by posting a blowout quarter amid continued negative political sentiment directed at the industry.

UnitedHealth's reported on Tuesday that net income jumped 21 percent to $1.19 billion, or $1.03 per share, from $984 million, or 81 cents per share, a year earlier. Profit far surpassed the average estimate of 69 cents per share expected by analysts, according to Thomson Reuters I/B/E/S.

The largest health insurer by market value also raised its full-year profit per share view, to a range of $3.15 to $3.35 from $2.90 to $3.10 before.

Normally, United's earnings would be a cause for celebration, as the results confirm that fundamentals in the industry are even better than the market's high expectations, Oppenheimer & Co analyst Carl McDonald said in a research note.

Today, though, the earnings report just makes us cringe, because we can't emphasize enough how fragile the political environment for this group still is.

Indeed, U.S. Senator Tom Harkin, chairman of the Senate health committee, pointed to UnitedHealth's earnings report at a hearing on health insurance plan premium increases.

UnitedHealth Chief Executive Stephen Hemsley, speaking to analysts on a conference call to discuss the results, said the company's results are what they are, and that's what we have to report.

Hemsley also said the company itself has long sought to improve the healthcare system and its interests are more aligned with the government than they are separate.

UnitedHealth shares were down 16 cents at $31.07 in midday trading on the New York Stock Exchange.

MEDICAL LOSS RATIO UNCERTAINTY

UnitedHealth is the first health insurer to report results since Congress passed the health overhaul. The law -- whose debate roiled shares of health insurers -- imposes new regulations and fees on the industry as it expands insurance to 32 million Americans without coverage and ends practices such as refusing to cover people with pre-existing conditions.

For the quarter, UnitedHealth's revenue rose 5.4 percent to $23.19 billion, ahead of the $22.76 billion that analysts had expected.

The company spent 81.3 percent of premium revenue on medical costs in the quarter, down from 82.4 percent a year before, citing a mild flu season and strong expense management.

The medical loss ratio (MLR), which Wall Street has always watched closely, has come under increased scrutiny by Washington and will be regulated under the new law.

The government is in the process of devising rules for how the MLR will be calculated and applied, causing uncertainty for the industry.

You just don't know the sustainability of this year's results, which look to be robust, because you don't know how sustainable they are until you know what the minimum MLR regulations are going to be, Collins Stewart analyst Brian Wright said.

In UnitedHealth's commercial business serving employers, membership fell by 275,000 in plans for which the insurer assumes full insurance risk, while rising by 170,000 in less-lucrative plans for which it just provides administrative services. Both results were ahead of company projections, Wright said.

UnitedHealth also upgraded its outlook for membership in its commercial business. Such plans have been hit by layoffs stemming from the weak economy as fewer people employed mean fewer with health coverage.

Revenue in the UnitedHealth unit with Medicare plans for the elderly rose 10 percent to $9.3 billion. Revenue for its Medicaid plans for the poor rose 22 percent to $2.3 billion.

UnitedHealth recognized $490 million in unused reserves for paying claims from prior periods, compared with $200 million a year earlier, helping results. That contributed 17 cents to the earnings beat, Wright said.

Through Monday, UnitedHealth shares had gained 2.5 percent this year, in line with rivals, as investors remain uncertain about the impact of the health reform law to industry profits.

(Reporting by Lewis Krauskopf, additional reporting by Susan Heavey in Washington; Editing by Gerald E. McCormick and Derek Caney)

Healthcare