UnitedHealth Group’s Q2 Earnings: Steady Growth, Obamacare Results Unclear
UnitedHealth Group (NYSE: UNH) reported its second quarter results yesterday. They show an enterprise that is firing steadily on all cylinders. UNH has two main businesses: UnitedHealthcare, the health insurer; and Optum, a portfolio of businesses that provide services crunching Big Data to customers that include other insurers.
From the press release:
- Second quarter revenues grew 11% year-over-year to exceed $36 billion,
- UnitedHealthcare grew to serve 1.6 million more people domestically in the past year, including 175,000 people in the second quarter
- Optum revenues of $13.6 billion grew 16% year-over-year; operating earnings Increased 19%
- Second quarter net earnings grew 15% year-over-year to $1.64 per share, with cash flows from operations of $1.2 billion.
During the earnings call, management was careful to duck questions that invited them to comment on the whirlwind of mergers and acquisitions rocking the industry. They expect the previously announced (March 30, 2015) takeover of pharmacy benefit manager Catamaran to close in a couple of weeks. The newly acquired PBM will not have an impact on 2015 earnings, as its contribution this year will be eaten up by closing costs and paying down debt. It looks like share repurchases will recommence once the acquisition debt is whittled down.
There were not many surprises, except that the “medical care ratio” improved to 81.4 percent, an improvement of 20 basis points. However, this was slightly disappointing to analysts, many of whom expected the ratio to be under 81 percent. This ratio is the quotient of revenues divided by medical costs, although I have written it in quotation marks because the regulated term is “Medical Loss Ratio,” which was newly defined by Obamacare. There may be a difference in calculation between the ratio reported in the earnings and that reported to regulators. (Indeed, during the call, a UNH executive referred the “coordinated care ratio,” which is a remarkable term because not all of UNH’s plans are characterized by coordinated care.)
What was not disclosed? The medical care ratio for plans in Obamacare’s exchanges. The reporting of only a consolidated ratio, without breaking it down by segment, frustrated many analysts on the earnings call. Matthew Borsch of Goldman Sachs indicated that UNH formerly reported the ratio by segments. Everyone understands that health plans are losing money on the exchanges and we’d like to know exactly how this is impacting their businesses.
Nevertheless, UNH continues to succeed under the new health law. The quarterly dividend was $0.1625 in May 2015 (the first quarter after the Affordable Care Act was passed) and has increased steadily to $0.50 in June 2015.
When the ACA was being debated in Congress and Democrats were pushing hard for a public option as the next best thing to a single payer system, which is what they really wanted, UNH stock sank as low as $14 per share. It’s now $124 and the trend is up. The company is pushing hard to expand value based payment models at the expense of traditional fee for service reimbursement and AHIP hired former CMS Administrator, Marilyn Tavenner, as its new CEO. The Catamaran acquisition will vault Optum’s PBM into a virtually tie for 2nd largest with CVS-Caremark which should give it more power to negotiate drug prices, especially specialty drugs, with manufacturers.
Interestingly, CBO initially projected that Medicare Advantage enrollment would shrink by 35% by 2019 from what it was in 2010. It has actually grown by 42% since then. It looks like MA is here to stay and I think that’s a good thing both for investors and for Medicare beneficiaries.
If the current Big Five publicly traded health insurers consolidate down to three – United, Anthem and Aetna, that will be a good thing as well in my opinion. The payers will have more power to negotiate reimbursement rates with large hospital systems while there will still be sufficient competition to provide plenty of insurance plan choices to the marketplace.
Thank you. However, UNH has quit AHIP. What do you make of that?
I didn’t know that and don’t know what to make of it. Maybe they think they have a competitive advantage in data and analytics that they don’t want to share with other AHIP members but I have no idea.
As a provider I can attest to how UHC is squeezing to the point that being IN a network costs us money. Its unsustainable. While they boast of record profits – those folks on the front line aren’t factored in much. On pharmacy claims they are one of the worst with MAC pricing that they refuse to update with generic pricing escalating, however, they make their own money and act as if that’s good.
Very sad and the greed is getting so bad by the big players that “price controls” and/or socialized medicine for everyone will end up being the (only) unfortunate ultimate solution.
Thank you. However, your statement invites the question of why you remain in the network?