Dear Mr. Berko:

I want to own a health insurance stock and I’m trying to decide between UnitedHealth and Cigna. Which one of these companies would you recommend? I’ve been reading your column for years and I’ve never seen you recommend a health insurance company. Why is that? You must know that many of them have been good investments.

T.W., Durham, N.C.

Dear T.W.:

UnitedHealth Group Inc. (UNH-$90.82) provides health care and related services to 52 million Americans. With $37 billion in 2004 revenues, UNH is the second-largest health insurer in the country, and its record is mighty impressive.

In 2000, UNH took in $21 billion and earned $700 million from the pain and suffering of its policyholders. This year, the suits on the Street expect the company to generate $44 billion in revenues and net $3.1 billion, so the suits reckon UNH’s shares will trade above $105.

This is a remarkable record for a company that, with other health insurers, has been the focus of legal actions under the Racketeer Influenced and Corrupt Organizations Act. The RICO claims suggest that UNH and other health insurers denied treatment based upon financial criteria, denied payment for legitimate claims, paid bonuses to claims reviewers to meet claims-denial quotas, purposely delayed patient treatment and “engaged in a common scheme of misrepresenting to the subscriber the amount of coverage they receive.” This is just the tip of the iceberg.

All of this aside, UNH’s record of revenue growth is a tribute to its keen management. The company’s outstanding earnings record is due to management’s uncommon ability to keep costs low and lower. I’m particularly impressed by UnitedHealth’s ability to cancel contracts with physicians it feels may overtreat patients and run costs higher than the company’s statistically preferred model. And I’m awed by UNH’s prescription controls, in which they require doctors to prescribe generic brands that may not be as effective as a newer formulary. And I’m enthralled with the company’s physician/patient/hospital accounting, which is so complicated that only a Philadelphia lawyer can interpret the numbers.

UNH’s management is coldly calculating, dazzlingly creative and incredibly brilliant with a laser focus on the bottom line. Yes, I, too, believe the stock will march higher and higher and higher. I believe that UnitedHealth will continue to be a stellar performer as long as it and other health insurers are given carte blanche to control the health-care system.

I’d certainly prefer to own UNH over Cigna Corp. (CI-$91.78). Cigna has $14 billion in revenues and $790 million in net income and is less than half the size of UNH. I feel CI’s share price has moved up too high and too fast in the past six months and I don’t think its fundamentals support the current price.

Cigna’s medical costs are probably the highest among its peers and its management does not have adequate control over its underwriting or its doctors in order to keep costs low. Cigna’s management lacks the stalwart cunning of the lads at UNH, its marketing program has no snap and its membership rolls are shrinking. Enrollment was down significantly in 2004 and it’s expected to decline again this year.

Cigna’s management needs to use its capital more efficiently (CI reduced its dividend last year to 74 cents from $1.32 and has since cut it to 10 cents) and must get a better handle on its executive compensation, office salaries and processing costs. Revenues for 2005 are expected to be lower than 2004 and earnings may be lower, too.

The reason I don’t recommend health-care stocks is personal. These companies (Aetna, WellPoint, PacifiCare, Blue Cross, Humana, American Medical, ad nauseam), that purport to keep health-care costs low may be participating in the greatest legal fraud of the century.

In 2004, the top six health insurers sucked in about $150 billion in premiums and paid out about $90 billion to doctors, hospitals and pharmacies. This $60 billion gap represents just the six largest, for-profit health insurance companies. And that’s enough money to pay the health-care premiums for the 40 million people in the United States who can’t afford insurance. Multiply this number by a factor representing all non-government health insurers, and these health carriers retained more than $130 billion of your premium payments last year. Any way you stack it, that’s a lot of money.

It burns like acid in my gut to learn that top executives H. Edward Hanway of Cigna, Dr. William W. McGuire of UnitedHealth, Dr. John W. Rowe of Aetna, David A. Jones of Humana, Leonard D. Schaeffer of WellPoint and Howard Phansteil of PacifiCare earned $9 million, $11 million, $10 million, $6 million, $46 million and $7 million respectively last year. And those numbers don’t include perks and retirement plans. I can’t condone this duplicity.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.