Health Insurance Exchanges And Their Impact On UnitedHealth Group

The first enrollment period under the Patient Protection and Affordable Care Act (PPACA), or Obamacare, ended in March. While the implementation of the health insurance exchanges was not without issues, some 8 million enrollments were registered, which exceeded the anticipated 7 million. ^[1] With the effects of the exchanges finally being seen throughout the health insurance industry, below we take a look at the impact the exchanges – and the other parts of the PPACA – have had on UnitedHealth Group (NYSE:UNH) and the strategy the company is adopting to operate in the new market conditions.

Our price estimate for United Health is $77, which is slightly below the current market price.

See Full Analysis For UnitedHealth Group Here

Open Enrollment Period

Customers enroll in certified health plans through the exchanges during set periods called open enrollment periods (OEP).  According to data released by the U.S. Health & Human Services, age and gender-specific data for the first OEP ending March 31 2014 shows that one third of the enrollees were under 34 years of age, while nearly half of the total enrollees reported are females. ^[1] The second OEP for the 2015 coverage period is scheduled for November 15, 2014 through February 15, 2015.

How is UnitedHealth Performing?

UnitedHealth is the largest individual health insurer in the U.S. with a market share of around 14% in the U.S. in terms of number of policyholders. The company had over 26 million individual policies in force as of 2013, in addition to over 10 million covered by Medicare.

EBITDA margins have seen pressure in the last few years, hovering around 8% from 2011 through 2013. The effects of the ACA contributed to a 110 basis point decline in margins for the first quarter of 2014. ^[2] Going forward we expect the margins to remain relatively unchanged and settle just under 8% levels. This is a result of two factors: the primary driver will be the change in requirements brought about by the PPACA that requires insurers to maintain medical care ratios (medical costs divided by premiums) of 80% for individuals and 85% for group insurance. This is considerably higher than the medical care ratios that the company has maintained for years. Additionally, there may be pricing pressure from the growing competition brought about by customers’ exposure to multiple private health insurers due to the exchanges, which could impact margins.

UnitedHealth has so far exhibited limited interest in offering policies via health insurance exchanges. UnitedHealth participated in just 13 exchanges across 10 states and the District of Columbia in 2014, out of nearly 100 exchanges nationwide. ^[3]

How is Competition Shaping Up?

WellPoint, the second largest health insurance provider in the U.S., saw strong enrollments after heavy marketing spend related to the exchanges. It added nearly 600,000 new customers via the exchanges during the first OEP. ^[4] Other large players such as Cigna have had a restricted presence until now and may look to expand their presence in the upcoming enrollment period only selectively. On the other hand, smaller regional players have seen gains from being early entrants on state exchanges, and plan to expand to other states in the coming years. This bodes well in terms of competition among health insurers, but also poses a significant risk to bigger groups such as UnitedHealth. ^[5]

Future Outlook and Strategy

As the newly created dynamic marketplace becomes the norm, it may become difficult for UnitedHealth to stay off of the exchanges. There are still many uninsured individuals in the U.S., many of whom will likely enroll in health insurance through the exchanges. This is a significant opportunity for UnitedHealth, one that would be difficult to capitalize on if it isn’t on most of the exchanges throughout the country.

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1. U.S. Department of Health & Human Services, Press Release May 1 2014 [↩] [↩]
2. SEC Filing 8K, April 2014 [↩]
3. SEC Filing 10 Q, April 2014 [↩]
4. WellPoint profit beats expectations as exchanges fall in line [↩]
5. Insurers Once on the Fence Plan to Join Health Exchanges in ’15 [↩]