The Patient Protection and Affordable Care Act (PPACA) comes into action today, October 1, as health insurance exchanges open across the U.S., offering subsidized healthcare to millions of U.S. citizens.  Despite the shutdown of the Federal government on Monday, September 30, night, the Federal website for health coverage is expected to go live at 8am Eastern Time, while state insurance sites will also be operational. The PPACA, or Obamacare, which makes health insurance mandatory for Americans will impact health insurance companies such as UnitedHealth Group (NYSE:UNH).
UnitedHealth is the largest health insurer in the U.S., accounting for over 14% of the total private health insurance enrollments in the country. While the company will benefit from increased enrollments from the PPACA, it will also face increased medical charges as the act mandates a minimum medical care ratio (medical costs divided by premiums) for health insurance providers.
Our $75 price estimate for UnitedHealth’s stock is in line with the current market price.
The 2010 U.S. census revealed that 83% of the U.S. citizens are covered by health insurance. Around 65% are privately insured while 15% are covered by Medicare or Medicaid.  There are nearly 30 million Americans currently not covered by any form of health insurance. 
Around 7 million Americans are expected to enroll in health insurance plans by 2014.  There are currently around 187 million private health insurance enrollments in the U.S. of which 26 million are enrolled with UnitedHealth giving it a market share of 14%. We expect a marginal loss of market share for the company due to the opening of the health insurance exchanges, which will give citizens more choice while selecting an insurance plan. As a result, we expect the company’s total enrollments to remain around 26.5 million by 2014. However, in the long term, we expect UnitedHealth’s policyholders to reach 29 million by the end of the decade.
Medicaid is a U.S. government program which provides healthcare for economically disadvantaged, medically under-served people and those without the benefit of employer benefit plans. UnitedHealth’s Medicare Managed division provides managed care solutions and insurance coverage to Medicaid beneficiaries. In return for the services and coverage provided, the insurer receives a monthly premium per member from the applicable state.
As per the PPACA, eligibility requirements for Medicaid will be relaxed from 2014 onwards, people under 65 with income of up to 138% (133% plus a 5% disregard) of the existing poverty line will be able to obtain health benefits from state-run Medicaid programs. UnitedHealth currently has a market share of 9.5% of the 40 million Medicaid enrollments in the U.S. and around 8 million additional people are expected to enroll by 2014.  As with the individual health enrollments, we expect UnitedHealth’s market share to decline in the coming years. We expect that the company’s total enrollments will reach 5 million by the end of the decade.
The Impact On Margins
Medical costs account for more than 80% of UnitedHealth’s operating expenses (excluding Depreciation and Amortization) and the company has maintained a medical care ratio of 80% for the last few years, allowing its EBITDA margins to stay around 9%. However, the PPACA mandates a minimum medical care ratio (medical costs divided by premiums) of 80% for individual and small group plans, and 85% for large group plans. A medical care ratio of 85% would drive the EBITDA margin to as low as 3%. The company has undertaken several cost-cutting measures to reduce operating costs and we expect the margins to drop to just 7% in the coming years.Notes:
- Obamacare launch poised to reach millions despite shutdown drama, Reuters, October 1, 2013 [↩]
- Health Status by Selected Characteristics and Health Insurance Status: 2010 [↩]
- FACT SHEET: The Affordable Care Act: Secure Health Coverage for the Middle Class, The White House, Office of The Press Secretary [↩]
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- Ref: 2 [↩]