UnitedHealth Group (NYSE:UNH) is the largest health insurance provider in the U.S., with over 45 million enrollments nationwide. The company provides private insurance, Medicare and Medicaid managed care coverage to its customers, in addition to ancillary services such as prescription drug services through its Optum brand. The company has seen significant growth in enrollments over the past several years, and we expect that U.S. healthcare reform will allow it to meaningfully increase its enrollments over the next four years.
We recently launched coverage of UnitedHealth Group with a price estimate of $70, which is about 25% ahead of the current market price.
UnitedHealthcare Insurance is Primary Value Driver
The company has two primary brands: UnitedHealthcare, which provides private insurance, Medicare and Medicaid coverage; and Optum, which provides ancillary services like pharmacy benefits, consulting and business process outsourcing. UnitedHealthcare accounts for more than 80% of the company’s value, according to Trefis estimates.
For our analysis we have broken the business down into three operating segments:
- Private Health Insurance: Provides insurance plans for individuals as well as employers who take take care of their of employees’ health insurance plans. The company provides risk-based plans, in which it assumes the risk associated with customers’ medical costs, and fee-based plans, in which it only provides administrative services, mostly to larger companies which decide to self-fund healthcare costs of employees. As of September 30, 2012, UnitedHealth Group served nearly 27 million private health insurance customers.
- Medicare: Provides healthcare services, primarily to individuals aged 65 or older. Medicare is a government-run program, and services are bought on a contract basis by the Centers for Medicare and Medicaid Services (CMS) and the American Association of Retired Persons (AARP). As of September 30, 2012 UnitedHealth Group served about 11 million Medicare enrollments, including those through the AARP.
- Medicaid Managed Care: Provides managed care solutions and insurance coverage to Medicaid beneficiaries. Medicaid is a U.S. government program which provides healthcare primarily for economically disadvantaged or medically underserved people. As of September 30, 2012 UnitedHealth Group served nearly 4 million Medicaid beneficiaries.
The Optum division is broken down into three operating divisions:
- OptumHealth: Provides a range of specialized health and wellness services to its customers such as mental health and substance abuse treatment and counseling.
- OptumInsight: The consulting division of UnitedHealth Group, providing business process outsourcing, advisory and data processing services to its clients.
- OptumRx: A pharmacy benefits management business which processes prescription drugs for its customers and helps them get drugs at reduced costs.
The Optum division allows the company to offer a diversified service offering, thus differentiating itself from competitors, which include Wellpoint (NYSE:WLP) and Aetna (NYSE:AET).
U.S. Healthcare Reform Presents Opportunities, Risks
The Patient Protection and Affordable Care Act (“PPACA”) is a healthcare reform bill passed into law in 2010, aiming to reduce healthcare costs and expand healthcare coverage among Americans. Most of the changes will be implemented within the next 2-3 years. The bill includes an individual mandate, which penalizes individuals who can afford health insurance but choose not to purchase it. It also expands the availability of Medicaid and restricts the ability of insurers to refuse service to customers with pre-existing conditions. As a result, the government estimates that an additional 30 million Americans will have health insurance (either private, Medicare or Medicaid) over the next five years.
The act will also introduce health insurance exchanges in order to encourage competition in the market, and will regulate premiums and medical care ratios (medical costs/premiums) of health insurers. This will likely have a negative effect on large insurers such as UnitedHealth Group, as it will result in pressure on pricing and mandatory caps on margins. However, we believe that the benefits for UnitedHealth from the increase in enrollments will outweigh the pressures on pricing and margins.
Eventual Economic Recovery to Drive Near-Term Growth
Private health insurance enrollments have been stagnant over the past few years due to persistently high unemployment and weak macroeconomic conditions. High unemployment levels have had an adverse impact on the number of employer-sponsored health insurance enrollments, while Medicaid enrollments have increased steadily. Additionally, many employers have cut healthcare benefits in response to market conditions. However, as economic conditions gradually improve, we expect employer-sponsored health coverage to increase along with the quality of those plans (which will in turn bring higher premiums).
UnitedHealth recently agreed to acquire Amil Participacoes SA, Brazil’s largest health insurer with over 5 million customers, for $4.9 billion.  This will allow the company to expand its footprint outside of the U.S. and capitalize on the growth potential in Latin America. The deal is expected to close in 2013, and we will update our analysis to include the acquisition when more information is available.Notes:
- UnitedHealth to buy most of Brazil’s Amil for $4.9 billion, Reuters, Oct 2011 [↩]