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UnitedHealth Group (UNH)Stock (Health Insurance Industry, Insurance Industry, Pharma & Healthcare Industry)
UnitedHealth Group (NYSE:UNH) is the parent company of various other health services organizations and health insurers. With $75.4 billion in revenue for 2007, UNH is the second-largest publicly traded health insurance company in the United States. 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. 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 Ingentix, 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.
[edit] Business OperationsUnited 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 $75.4 billion in consolidated revenue in 2007, almost all of which of which was derived from health insurance services. 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 Health Care Services.
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. The fraction of all revenues spent on paying claims is called the medical loss ratio (MLR); United's MLR was 82.1% in 2007. The fraction of administrative expenses to premiums is the medical cost ratio, and in 2007 it was 13.8% An insurance company can actually turn a profit even if the cost of administration and insurance claims equals the premiums it generates. It does so by investing income on the float. The idea is that in the time between when a client pays a premium and the time when the client needs payment for his or her medical expenses, United Health can invest the premium. [edit] SizeIn 2006, UNH's various divisions served some 22 million customers. Of these, about 7 million were sponsored by the government through Medicare (5.6 million) or Medicaid (1.4 million). The remaining 15 million were divided into 10 million risk-based and 5 million fee-based customers. 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 largest insurer in the United States, and the company's size translates into a scale advantage over many competitors. 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. [edit] Information ManagementUnited 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 (18.4% in 2007). 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. [edit] Trends and Forces[edit] ConsumerismHistorically, 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. [edit] Generic Drugs 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. [edit] Backdating ScandalIn 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. This scandal has marred the company's public image, which could manifest itself in the form of lower enrollment. [edit] National HealthNational health insurance has become a hot topic on the legislative agenda. The national insurance plan is currently quite limited, restricting participation to lower-income (Medicaid) and senior citizens (Medicare). A national insurance program for some children is under consideration in congress. If passed, it would greatly expand the coverage offered by S-chip, the insurance program sponsored by both state and federal governments. More and more, individual states have begun offering their own universal health care plans, with Massachusetts and California leading the way. These plans, if they become more widely implemented, could increase competition for UnitedHealth and other insurance companies. But the federal subsidies also present another possible risk; because of the looming budget deficit, funding may not always exist for Medicare. If the government were to cut the program's budget, United would lose both enrollment and revenue. Since Democrats, who have historically been more keen to promote programs like Medicare, currently control both houses of Congress, a substantial cut in Medicare funding is fairly unlikely, at least for the near future.  Nonetheless, Medicare spending is expensive--at $230 billion, it was one of the Federal government's greatest expenses in 2006. This is because the elderly require substantially more medical care than younger people, often at a higher cost, and the U.S. population is aging at a considerable rate. This has two potential effects for UNH. A population with greater health care needs requires additional insurance: age drives demand. But to the extent that people already insured face rising health care costs, medical losses rise in response to population aging. The national plans under consideration usually call for the government to provide insurance. But Medicare part D, effective January 1, 2007, enables all Medicare-eligible senior citizens to purchase medication with the help of subsidies from the federal government. Whereas the competition inherent in national insurance is bad for United's bottom lines, subsidies can only boost profitability. Of the 40 million eligible seniors, some 6.5 million have already signed up for the program. Since the plan provides a direct subsidy to insurers, it should reduce United's net outlays for customers' prescription drugs and other medical expenses. Two of United's three main segments are financed by the federal government. Together they represent some 40% of United's revenue. Ovations, the Medicare division, is quite large and profitable, with $25 billion in revenue in 2006. AmeriChoice, the Medicaid wing of United, generated only $3.7 billion in revenue. That division remains important, however, because it represents a steady, nonvolatile source of income. [edit] Competitive ComparisonThe 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 for United, however, these fees have not been significant.
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. Nonetheless, 5.25% of $65 billion is still a lot of money; in terms of nominal profit, United does just fine. 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 Well Point, another national insurer, which scores a whopping 32.9%.
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