Under Pressure From Federal Budget Cuts, UnitedHealth Scales Down Its Network

Under pressure from Federal budget cuts in the Medicare Advantage program, UnitedHealth Group (NYSE:UNH) is dropping doctors from its Medicare Network. ^[1] The company’s third quarter operating margin dropped from 8.6% in 2012 to 7.1% this year, primarily due to government underfunding of the Medicare Advantage program. The insurer has started sending termination letters and expects to cut its network down to 85% to 90% of its current size of 350,000 by 2014. There are close to 50 million Americans enrolled in the Medicare program, of which around 21% are enrolled through UnitedHealth, making it the largest provider in the country. The company earns 30% of its revenues and 32% of its EBITDA from the Medicare and Retirement division.

Our current price estimate for UnitedHealth stands at $73, in-line with the current market price. However, spending cuts by the government as well as a loss in market share could lead to a 10% downside to our price estimate for the company.

See Full Analysis For UnitedHealth Group Here

How Does Medicare Work?

The Medicare program is run by the Centers for Medicare and Medicaid Services (CMS) and provides healthcare services to individuals aged 65 or older and younger people with disabilities. United HealthCare Medicare and Retirement provides health care insurance coverage in return for a fixed monthly premium per member served from 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.

Medicare funding comes from the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund, held by the U.S. Treasury. ^[2] The funds utilize payroll taxes paid by employees and employers as well as other sources like income taxes paid on Social Security benefits and premiums from people who aren’t eligible for premium-free Medicare coverage. Total government expenditures on the Medicare program are around $550 billion per year.

How Will Cuts Affect UnitedHealth?

Facing political pressure to curb costs for the Patient Protection and Affordable Care Act (PPACA), the government has decided to cut Medicare payments to insurance companies by nearly 30% in the next 10 years. ^[1] UnitedHealth has been preparing for the rate reductions and has resorted to cost cutting and fraud prevention measures in recent years. However, after government cuts affected the top line in Q3, management has decided that it will have to scale down its network of doctors as well.

UnitedHealth currently has a market share of 21% in the U.S. and earns $315 in monthly Medicare premiums per beneficiary on average. We have revised our forecast for the company’s market share, with a moderate decline through the rest of the decade. We are also incorporating the Obama administration’s decision to cut back on Medicare funding and expect the average monthly premiums to decline in the coming years. However, should the company’s market share fall to 15% and the monthly premiums drop to $250 per month as a result of the budget cuts, UnitedHealth’s annual revenue could take a 10% hit. There is a 10% downside to our price estimate in this scenario.

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1. UnitedHealth Culls Doctors From Medicare Advantage Plans [↩] [↩]
2. How is Medicare funded?, Medicare.Gov [↩]