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UNH AT A GLANCE

P/E ► 9.10   EV/EBITDA ► 21.8   ROA ► 7.5%   ROE ► 16.8%   Debt to Equity ► 1.51   Current Ratio ► 0   Interest Coverage Ratio ► 3.73

 

 

 

 

UnitedHealth Group (NYSE:UNH) is the parent company of various other health services organizations and health insurers. With $81.2 billion in revenue for 2008, UNH is the second-largest publicly traded health insurance company in the United States.^[1] As such, it has significant scale advantages that extend across its major product lines, allowing it to attract new member hospitals as well as negotiate for lower prices.

The company generates 90% of its revenues through three health insurance organizations: one for private clients, one for Medicare recipients, and one for Medicaid beneficiaries.^[2] The government-sponsored clients represent an important source of business for UNH, so the current national health care debate could heavily impact United's operations. United has a number of other products and services, the most significant of which is its Ingenix, a data gathering and analysis division. United uses the data to evaluate the effectiveness of its doctors and hospitals; the company also sells the information to other health industry professionals. As of 2008, UNH has acquired three companies--Unison Health Plans, Sierra Health Services, and Fiserv Health-- for $4.2 billion.

Business Overview

United Health Group consists of many separate divisions, which offer a wide range of products and services geared toward the health care industry. The company earned $81.2 billion in consolidated revenue in 2008, approximately 90% of which was derived from health insurance services, also known as premiums.^[2] United has three subsidiaries that provide health insurance: United Health Care, Ovations, and Americhoice. United Health Care sells to individuals and companies, Ovations provides Medicare benefits, and AmeriChoice handles Medicaid clients. In the following table, AmeriChoice, Ovations, and Commercial Markets revenue have all been consolidated as Premiums:

Business Financials

Health insurance service is the most important part of United's operations by far. These insurance divisions essentially sell protection from risk: as insurers, they agree to pay for a percentage of their customers' medical expenses in exchange for a fee, called the premium. The basic business plan is to offer clients a premium based on the the expected cost of caring for them, plus a markup for administrative costs and profit.

Size

In 2008, UNH's various divisions served some 70 million Americans. Of these, about a third were sponsored by the government through Medicare (5.6 million) or Medicaid (1.4 million). The remaining two thirds were divided into risk-based and fee-based customers.^[6] Fee-based customers are usually businesses that pay a certain rate to insure all their employees, whereas risk-based customers are individuals who pay for their insurance. Fee-based customers generally pay a flat rate for coverage, whereas risk-based customers pay premiums determined by their "riskiness", or the likelihood that they'll need extensive medical services later on.

These numbers make UnitedHealth Group the second largest insurer in the United States, and the company's size translates into a scale advantage over many competitors.^[4] Because UNH has such a large customer base, it has considerable bargaining power when negotiating with hospitals and physicians (that it might want to employ). Its size may also be attractive for hospitals looking to join United's network, since United can pretty much guarantee them a steady stream of business. United has sought to maintain its scale advantage throughout the country by acquiring smaller health insurers like PacifiCare on the West Coast and Oxford in New England.

Information Management

United Health Group's Ingenix division is the research wing of the company that gathers and analyzes company data, as well as data about the health care industry as a whole. The company uses the data for its own purposes and also sells the information to other players in the health care industry. Ingenix's main customers are medical device manufacturers, health insurance providers, and health care professionals. Although Ingenix represents a small portion of UNH's total revenues--about 2%, historically--it has potentially valuable synergies and a high operating margin (14.8% in 2008).^[7] The data management techniques are an important part of UNH's consumerism campaign to provide more efficient service and to foster stronger relationships with its clients. Moreover, as the industry leader by enrollment, UNH has only limited opportunities to expand its business by taking on more members. Instead, it can grow by developing new lines of products and services. Ingenix has been among the fastest growing segments at UNH; its revenues increased by 30% between 2006 and 2007 but dropped by 27% in 2008.^[7]

Quarterly Earnings

For the year ended on December 31, 2009, United’s revenues totaled $87.14 billion, up 7.3% compared to the previous year, while fourth quarter revenues of $21.8 billion also advanced 7 percent year-over-year. Yet operating income was basically the same, at $6.36 billion in 2009, as its operating margin fell from 7.8% in 2008 to 7.3% in 2009. ^[8]

Trends and Forces

Healthcare reform will impact many aspects UnitedHealth Group's business

Potential healthcare reforms vetted by the Obama Administration and currently under review in Congress would remake the structure of the American health-care system. UnitedHealth Group stands to both benefit and be hurt by the new healthcare reform proposals. One one hand, expansion of Medicaid to tens of millions of currently uninsured Americans would drive revenue growth for UnitedHealth Group. On the other hand, increased taxes and publicly-driven competition in the health insurance market would hurt UnitedHealth Group's bottom line. It is important to note, however, that nothing has been set in stone with regard to a final healthcare reform bill, and there can only be speculation regarding what form healthcare reform will eventually take.

One feature of the healthcare reform proposal is a government-run insurance program. Such a program would grab market share from private insurance companies, thus hurting the bottom line of companies such as UnitedHealth Group. However, this facet of the healthcare reform bill is a point of controversy that received criticism from Republicans and some moderate Democrats. In the face of this opposition, President Obama has stated that he would be willing to accept a proposal that included non-profit health insurance cooperatives instead of a government-run program.^[9] While cooperatives, in which consumers band together to form insurance groups (somewhat like a credit union),^[10] would introduce competition into the health insurance market, their fragmented nature in relation to a government-run program would make them a much less formidable competitive force against private health insurers. Another hot-topic issue involves the question of whether the government will tax health care benefits provided by employers.^[11] Such a tax would likely adversely affect health insurance companies, as the added consumer costs would eat away at margins.

UnitedHealth would benefit, however, from the expansion of Medicaid to the tens of millions uninsured Americans. UnitedHealth’s AmeriChoice is the largest government contractor program for administering Medicaid, bringing in $6 billion annually.^[12] Expanding the pool of citizens who qualify for Medicaid coverage would benefit UnitedHealth’s AmeriChoice program.

On September 8, details emerged regarding a healthcare reform proposal from Sen. Max Baucus that included $6 billion in annual fees to health insurance providers and a tax on high-end "luxury" health plans.^[13] In addition to substantially impacting the bottom line of UnitedHealth Group, these fees would force higher premiums on health insurers, which could adversely affect market share in the face of public competition. UnitedHealth Group shares fell 3.6% after announcement of the plan.

Rising healthcare costs and unemployment put pressures on earnings

Rising healthcare cost is a major concern for health insurance companies, and trends show healthcare costs for U.S. businesses rising 9% in 2010. These rising medical costs combine with the recession and increased unemployment to create a "tug-of-war" between the need to raise premiums and the downtrend on enrollment and willingness of consumers and business to pay high premiums.^[14] These competing pressures are having the overall effect of lowering UnitedHealth Group's revenues and margins. UnitedHealth Group's ability to mitigate the negative effects of rising healthcare and unemployment will be critical to it's ability to maintain strong earnings and compete in the health insurance industry.

Consumerism

Historically, health insurers like UNH have operated in much the same way; customers pay a premium then go see a doctor when they get sick. This approach suffers from a two-fold problem: customers may use the hospital more often than they would if they had to pay for each service, and when they use it, they often don't understand the treatment they receive. Consumerism aims to address both these problems by educating consumers about their health and health options in the hopes of discouraging the excessive use of medical services. Additionally, it also aims to make consumers more responsible for the costs they incur. UNH has responded to the consumerism movement by putting its data analysis to work; it has developed provider-quality measurements to analyze the effectiveness of its in-network health providers. This metric helps UNH identify high-cost, low-impact providers, therefore enabling the company to improve service and lower expenses by directing consumers away from such providers. These measures are also designed to inspire trust in UNH among its enrollees, in the hopes that building a relationship will help maintain membership.

Generic Drugs

Prescription drug costs are an increasingly large share of total costs

Prescription drugs expenses are one of the largest outlays that United Health makes on its clients' behalf, and prescription drug costs have been rising rapidly. Between 1995 and 2005, prescription drug costs increased by an average of 12%, while other medical costs increased by just 5-6%. UNH saves money when its clients purchase generic drugs instead of brand name drugs. The differences between generic and brand name drugs can be staggering: Costco Wholesale (COST) sells Prozac and Zocor for over $140, while their generic equivalents cost only $5 each.

In terms of a larger debate about the availability of quality health care in the U.S., there has been growing pressure on pharmaceutical companies to lower prescription drug prices by either cutting prices or granting generic licenses. This issue is often brought up in political discourse, with many politicians pushing for prescription drug reforms. United stands to benefit from these activists' success in achieving their goal of lower drug prices; whether through pharmaceutical companies' cost cutting or an increase in the availability of generics, United would see its outlays for patients' medications decrease, boosting profits.

Scandals

In 2006, UnitedHealth Group was investigated by the IRS and the SEC in response to allegations of options backdating. This practice essentially allowed executives to choose the price at which they can buy their company's stock, allegedly leading to inflated compensation. Backdating is illegal, as well as unnecessary; with the Board of Director's approval, company executives can compensate themselves as much as they please. Backdating is used mostly to avoid negative publicity by understating executive compensation. As a result of the allegations and subsequent investigation, United's CEO resigned. In January of 2009, UnitedHealth announced that it will pay $400 million to settle allegations that it manipulated payments to patients and doctors over the past 15 years. The class-action lawsuit claimed that UnitedHealth purposefully manipulated and underpaid patients that sought out-of-network services. ^[15]

Competitive Comparison

UNH is the second-largest player in the U.S. health insurance market, after Wellpoint. The table below shows United’s enrollment relative to that of its largest competitors across all of its books of business; their relative rank within the different markets they serve (e.g., private, Medicare, Medicaid) may differ.

Top 10 U.S. Health Plans by Total Enrollment^[16]

The following table compares United to three other leading health insurers across various measures of performance and profitability. The implied operating margin is equal to what the operating margin would be if investment income, premiums, and fees were the only source of revenue, and medical losses, benefits, and administration costs were the only expenses. In reality other factors also influence profitability, especially legal fees. Recently, however, these fees have not been significant for United.

Note that for Cigna and UnitedHealth Group, the data refer only to medical insurance, not other products.

UnitedHealth has traded scale for profitability. Relative to its peers, its 5.25% implied operating margin is unimpressive. United's lower profit margins are the result of its higher medical loss ratio, as its cost ratio compares favorably against those of its peers.

United is most impressive in its market penetration. It is difficult to compare market shares for health insurers since not all of them are active in every state, a result of variations in legislation from state to state. For example, even though United is based in Minnesota, it does not insure anyone there, since only nonprofits are allowed to do so. One way to make comparisons, however, is to calculate market share for a company in the 15 states in which it does the most business. This approach leads to a market share of 16.2% for United Health, second only to Wellpoint, another national insurer, which scores a whopping 32.9%.

References

1. ↑ UNH Annual Report on 2008 10K; Part One, Item 1 Business Financials, Page 1
2. ↑ ^{2.0 2.1} UNH Annual Report on 2008 10K; Part Two, Item 6 Selected Financial Data, Page 38
3. ↑ UNH Annual Report on 2008 10K; Part Two, Item 6 Selected Financial Data, Page 33
4. ↑ ^{4.0 4.1} UNH Google Finance Profile Page
5. ↑ [1]
6. ↑
7. ↑ ^{7.0 7.1} >UNH Annual Report on 2008 10K; Part Two, Item 6 Selected Financial Data, Page 37
8. ↑ Q4 2009 Earnings
9. ↑ Obama may drop U.S.-run health plan
10. ↑ What are Nonprofit Health Insurance Cooperatives?
11. ↑ Raising taxes at center of health care reform debate
12. ↑ Business Week: The Health Insurers Have Already Won
13. ↑ Health insurers, others hit as reform ramps up
14. ↑ http://www.reuters.com/article/healthNews/idUSTRE55H68320090618 Healthcare costs for U.S. companies seen rising 9 percent: survey]
15. ↑ http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=UNH%3AUS&sid=aHWuBDwhDhrc
16. ↑ [2] AIS Market Data | Top 25 U.S. Health Plans, Ranked by Total Enrollment (as of December 2007)