UnitedHealth Group (NYSE:UNH), the largest private health insurance provider in the U.S., is expected to announce results for the second quarter of 2013 on Thursday, July 18.  The company reported 11% year-on-year revenue growth through the first three months of the year with 13% growth in the Medicare & Retirement and Community & State divisions. The company is expected to benefit from the implementation of the Patient Protection and Affordable Care Act (PPACA) of 2010 and its stock has gained 25% since the turn of the year. The market price is now in-line with our $70 price estimate for UnitedHealth.
Private Health Insurance
Private health insurance, or Employer & Individual insurance is UnitedHealth Group’s biggest business, accounting for 35% of the company’s revenues and nearly 40% of its EBITDA. Through this division, the company offers insurance plans for individuals and employers covering their employee’s insurance plans. UnitedHealth is the largest private health insurance provider in the U.S., accounting for almost 154% of the total private health insurance enrollments in the country.
The company offers two types of services: risk-based insurance and fee-based insurance. The former covers the risk associated with medical as well as administrative costs within the premiums received while the latter covers only administrative and managerial services. Commercial fee-based insurance is usually chosen by large companies which self-fund healthcare costs of their employees.
During the first quarter of 2013, the company converted 1.1 million risk-based members of a public sector client to a fee-based arrangement. Although the company does not expect a significant bottom line impact from this change, revenues are expect to decline by around $2.5 billion for the year. Excluding this, the company reported organic commercial membership growth of 375,000 members through the first quarter. Around 480,000 customers enrolled in self-funded plans while 105,000 exited risk-based plans.
In the second quarter, the company announced that it will follow competitor Aetna in exiting the California individual health insurance market. UnitedHealth has a very small presence in California with a market share of just 1.1% and just 8,000 of its 27 million policyholders residing in the state.  We do not expect the exit to have a significant impact on UnitedHealth’s earnings.
Additionally, we do not expect an impact from the government’s decision to delay the employer mandate of its health-care act giving companies with 50 or more employees time till 2015 to provide affordable insurance to their employees.  A recent report by the White House suggests that 96% of all firms in the U.S. with 50 or more employees already offer health insurance to their employees, and this announcement will have little effect on our forecast for the company.
We expect UnitedHealth to lose market share in the coming years. The PPACA is expected to establish health insurance exchanges in each state from 2014, allowing individuals and businesses to compare policies and premiums and chose the one best suited for them. Although UnitedHealth is currently the market leader in the U.S., it competes with over 1,300 health insurance companies for market share. However, growth in the overall market will benefit UnitedHealth, leading to an increase in policyholders from about 26 million to close to 30 million. Please read our article: A Look At UnitedHealth’s Private Health Insurance Business for more on this division.
The commercial care ratio (medical costs divided by premiums) for the first quarter was 78.3%, and the company expects medical care ratio of 81.2% for the full year. The PPACA mandates a minimum medical care ratio of 80% for individual and small group plans and 85% for large group plans. The company has maintained a medical care ratio of 80% for the last three years, allowing its EBITDA margins to stay around 9%. We expect the margins to drop to around 7% in the coming years.
The Medicare and Retirement division accounts for 30% of the company’s revenue and 32% of the EBITDA. The division provides health care insurance plans to senior citizens and eligible younger people with disabilities, administered by the Centers for Medicare and Medicaid Services (CMS), using the American Association of Retired Persons (AARP) as a distribution medium. The company added 300,000 seniors to the Medicare Advantage plan through the first quarter of the year with 145,000 additions to Medicare supplemental benefits and 485,000 to standalone Part D drug benefits
The AARP caters to people aged 50 and more 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. For more on this division, please refer to our article: Key Drivers To UnitedHealth Group’s Medicare And Retirement Business
Medicaid is a U.S. government program which provides healthcare primarily for economically disadvantaged, medically underserved people and those without the benefit of employer benefit plans. These members are identified by states and are eligible for state-run Medicaid and other health care programs. UnitedHealth provides managed care solutions and insurance coverage to Medicaid beneficiaries. This division accounts for around 13% of the company’s revenues and EBITDA.
UnitedHealth reported an addition of 65,000 beneficiaries to its Medicaid program through the first quarter. The company is expanding services in Arizona, New Mexico, Nevada and Florida.