UnitedHealth Group’s (NYSE:UNH) stock has gained more than 15% this year with growth expectations driven by the implementation of the Patient Protection and Affordable Care Act (PPACA). In a previous article, we looked at the company’s private health insurance or employer & individual insurance. In this discussion, we focus on UnitedHealth’s Medicare and Retirement division, which accounts for 30% of the company’s revenue and 32% of its EBITDA.
UnitedHealthCare Medicare and Retirement provides healthcare insurance plans to senior citizens and eligible younger people with disabilities administered by the Centers for Medicare and Medicaid Services (CMS). The company provides coverage in return for a fixed monthly premium per member served by the CMS. Premium amounts are determined by factors such as area of residence, demographic factors like age and gender in addition to the individual’s health condition.
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UnitedHealth primarily uses the American Association of Retired Persons (AARP) as a distribution medium, offering a range of health insurance plans to 37 million members of the association. It also offers Medicare Part A services, which include hospital care services; Medicare Part B services, which cover outpatient services like physician visits; and Part C services, which combine features of both for state-administered Medicare programs.
There are around 49.4 million Medicare beneficiaries in the U.S.  UnitedHealth is the market leader in health insurance and has maintained a market share of around 20.2%. The company earns a monthly premium of around $328 per enrolled beneficiary with total revenues of around $39.2 billion.
To estimate the total number of enrollments in the coming years, we must take the demographics into account. The 2010 U.S. census revealed that 97.2% of the country’s senior citizens, above the age 65, are covered by Medicare insurance.  Among the younger populace, below 65 years, the penetration is just 2.6%.
There were about 35 million American citizens in the age group 55-64 in 2010, according to the 2010 U.S. census. The mortality rate is around 2% for senior citizens in the age group 65-74 years and around 5% for citizens in the ages 75-84 years.  From these figures, we can approximately assume close to 50 million senior citizens by the end of the decade. Given the high penetration observed in recent years, we can assume that roughly all of this population will be insured.
To this pool, we must add the younger eligible people. The U.S. population growth rate is around 1%, extrapolating this rate until the end of our forecast period, we get a population of 314 million by 2019. Assuming the penetration grows slightly from 2.6% to 3%, we get around 10 million enrollments from U.S. citizens under the age of 65 giving us a total of 60 million enrollments by the end of the decade.
The AARP caters to people aged 50 and older and has a 37 million strong customer base for UnitedHealth to build on. The AARP accounts for 40% of the company’s Medicare enrollments. The AARP arrangement extends up to December 31, 2017, and could possibly be renewed given the company’s market leadership position. Although the establishment of state-run health insurance exchanges under the PPACA will lead to increased competition, we believe that United Health can maintain a market share of at least 19% with its effective distribution network. This will mean around 11.5 million enrollments by the end of our forecast period.
UnitedHealth’s monthly premiums have grown at a compound annual growth rate of 2.77% over the last four years. However, the growth might slow down as Medicare Advantage plans will be required to have a minimum medical loss ratio of 85% under the PPACA. Also with the implementation of the Budget Control Act of 2011, Medicare payments across all types of services will likely be reduced in the coming years. Taking medical cost inflation into account, we expect a growth rate of around 1.2% to 1.7% in the coming years with monthly average premiums reaching $360 by 2019. With 11.5 million enrollments, the company can earn around $50 billion in revenues from the Medicare segment.
Our current price estimate for UnitedHealth stands at $70, implying a 10% premium to the current market price.Notes: