UnitedHealth Group (NYSE:UNH) is scheduled to announce earnings for the fourth quarter of 2013 on Thursday, January 16.  The results of the largest health insurer in the U.S. will provide some insight into the initial impact of the Affordable Care Act. The U.S. government has reported that more than 1.1 million Americans enrolled in health insurance plans between October 1 and December 24 through the website www.healthcare.gov.  Around 2 million users logged onto the website on December 24, the last day for coverage effective January 1, 2014. 
UnitedHealth had a market share of 14% in the U.S. health insurance market before the Obamacare online service was launched. Although the act is still in its nascent stage, we expect a rise in enrollments for the company. Our $74 price estimate for UnitedHealth’s stock is about in line with the current market price.
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Crucial Months Ahead
More than 7 million Americans are expected to sign up for health insurance by March 2014. The opening of health insurance exchanges might lead to a loss of market share for UnitedHealth as customers will now have more options to choose from. According to a report by the Department of Health & Human Services, consumers from various states will, on average, be able to choose from 53 health plans through the exchanges. More than 95% of customers will have a choice between at least two health insurers.  Nationwide average premiums are expected to drop by 16%.
However, UnitedHealth’s pricing strategy could also lead to an increase in market share. Although premiums vary greatly from state to state, UnitedHealth charges average monthly premiums of $150, lower than the national average of $328. This gives the company a cost advantage over other players like Aetna, which charges average monthly premiums of $364.  It should be noted that average premium rates vary greatly for each person depending on factors such as age and location. The average monthly premium is around $136 in Alabama and $437 in Massachusetts. 
According to the last U.S. census, around 17% of the U.S. population is uninsured.  The penetration was higher in the higher income class; 90% of the families with income greater than or equal to 200% of the poverty threshold had health insurance coverage, while the corresponding figure for families with income less than 200% of the poverty threshold was just 70%. A recent report by the White House suggests that 96% of all companies in the U.S. with 50 or more employees already offer health insurance to their employees. These figures indicate that most of the new enrollments will come from the lower income demographic, which will favor lower monthly premiums.
We currently expect a short-term decline in UnitedHealth’s market share, dropping to 13.5%. However, there is a 15% upside to our price estimate should the market share increase to 15% by 2015. We will keep a close eye on the company’s performance in the next few months and update our model accordingly.
Medicare Cost Cuts
Last quarter, UnitedHealth’s operating margin dropped from 8.6% to 7.1%, primarily due to government underfunding of the Medicare Advantage program. The Medicare program provides healthcare services to individuals aged 65 or older and younger people with disabilities. Total expenditures on the Medicare program are around $550 billion per year.  Due to political pressure to cut down on costs for Obamacare, the government has decided to cut Medicare payments to insurance companies by nearly 30% in the next 10 years.  As a result, UnitedHealth observed a 160 basis points increase in its medical care ratio last quarter, (medical costs to premiums) reaching 80.6%.
Following this, the company has been resorting to cost cutting and fraud prevention measures and, according to some reports, even dropping doctors from its Medicare Network.  UnitedHealth currently has a market share of 21% in the U.S. and earns $315 in monthly Medicare premiums per beneficiary on average. We expect a drop in market share in the coming months. UnitedHealth’s annual revenue could take a 10% hit 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. There is a 10% downside to our price estimate in this scenario.
Optum Going Strong
During the September quarter, UnitedHealth reported a 41% increase in OptumRx sales, leading to a 33% year-on-year increase in revenues from the Optum division. Expansion in government services allowed OptumInsight revenues to increase 11% over the prior year while OptumHealth revenues grew 21% due to expansion of clinical services. The operating margin for the division improved from 5.6% in the third quarter of 2012 to 6.6% in 2013. Our estimate for UnitedHealth’s EBITDA could increase by 10% should margins improve to over 7% through the decade. There is a 10% upside to our price estimate in that scenario.Notes:
- 2013 Earnings Release Dates, Investor Relations [↩]
- More Than 1.1 Million Sign Up Via ObamaCare Website, Forbes, 29 December, 2013 [↩]
- Record 2 Million Use Healthcare.gov Amid Additional Obamacare Signup Time, Forbes, December 24, 2013 [↩]
- Significant choice and lower than expected premiums available in the new Health Insurance Marketplace [↩]
- Aetna Becomes Third Insurer To Submit Rates For State Health Exchange [↩]
- Average Per Person Monthly Premiums in the Individual Market [↩]
- Health Status by Selected Characteristics and Health Insurance Status: 2010 [↩]
- How is Medicare funded?, Medicare.Gov [↩]
- UnitedHealth Culls Doctors From Medicare Advantage Plans [↩] [↩]