Optum Growth, Expanding Medicaid Coverage Drive UnitedHealth’s Earnings

UnitedHealth Group (NYSE:UNH) announced its third quarter earnings on Thursday, October 16, beating market expectations and lifting the stock by 4% to close the day at $85.39. The company reported 7% year-over-year growth in revenues to $32.8 billion. Operating income increased by 5% year-over-year to $2 billion, while the company’s operating margin was 6.8% compared to 6.1% during the previous quarter. ^[1] Growth in this quarter was driven by an expanding Medicaid membership base as well as consistent solid performance by the Optum division. ^[2] Optum alone contributed about 30% of the company’s operating income during the quarter.

Owing to consecutive quarters of strong performance, the company revised its EPS estimate to a higher range of $5.6o-5.65 from $5.55-5.60 for the current calendar year.

We have a price estimate of $83 for the company’s stock, which is in line with the current market price.

See Full Analysis For UnitedHealth Group Here

Optum Division Continues To Shine

The Optum division, which contributes about 30% of our valuation of the company, has been a major driver for UnitedHealth’s growth in 2014. Over the first nine months of 2014, Optum’s revenues have grown 26%. During the quarter, the division’s operating margins improved to 7.2% compared to 6.9% in the previous quarter. Revenues from the division surged ahead by 21% year-over-year to $12 billion.

OptumRx, which provides pharmacy benefit management services, processed around 142 million prescriptions in the third quarter, a 17% year-over-year increase in volumes. Consequently, revenues jumped by 27% year-over-year to $8 billion in the quarter.

Revenues from OptumInsight were up 4% year-over-year to $1.25 billion, due to the strong performance of the Optum360 revenue management service. The company expects stronger growth in the business on the back of its recent acquisition of MedSynergies, which will particularly expand its revenue management service to large integrated care delivery services. ^[3]

Medicare And Medicaid Also Added To Growth

The company continued to expand membership in the government sponsored Medicaid program with an addition of 250,000 new members this quarter. This led to a 34% year-over-year growth in revenues in the third quarter to $6.1 billion. The company expects the total customer base to expand by around a million new members in 2014.

During the quarter, the company’s customer base grew by around 80,000 members with new additions to the company’s Medicare advantage program, Medicare Supplement program and the Medicare part D drug plan. As a result, revenues for the Medicare and Retirement division clocked 4% year-over-year growth to $11.5 billion.

Slowdown In Employer And Individual Insurance Business

Owing to a decrease in the number of people served with risk-based products, revenues from the Private Insurance division fell to $10.6 billion from around $11.3 billion a year ago. There was a reduction of 65,000 members in commercial risk-based products, while the employee-sponsored fee-based products also saw a decline of 30,000 members. Currently, the company serves in excess of 28 million subscribers in this division across the U.S. ^[1]

Amil Sustains Growth Momentum

UnitedHealth has operations outside of the U.S. in Brazil through Amil S.A., which is the largest managed care service provider in the country. ^[4] Revenues from the business increased by 19% year-over-year to $1.8 billion on the back of an increase in hospital services revenue. Also during the quarter, there was a reduction in its membership base due to price increases. ^[2]

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. SEC 8-K Filing [↩] [↩]
2. UnitedHealth Group Incorporated’s CEO Gail Boudreaux on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha [↩] [↩]
3. Optum to Acquire MedSynergies to Help Physician Groups Enhance Patient Care, Improve Practice Performance, UnitedHealth Press Release [↩]
4. UnitedHealth to Buy 90% of Brazil’s Amil for $4.3 Billion, Wall Street Journal [↩]