Growth In Optum, Medicaid Drives UnitedHealth To A New High

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UnitedHealth Group

UnitedHealth Group (NYSE:UNH) reported earnings for the fourth quarter and full year 2014 on Wednesday, January 21, beating market expectations as it reported EPS of $5.70 for 2014 compared to $5.50 a year ago. [1] The company improved its top line, with consolidated revenues crossing $130 billion during the year. Operating earnings also jumped by about 7% year-over-year to over $10.2 billion. This was despite persistent fears of an adverse impact due to the implementation of the Affordable Care Act (ACA). [2] The company’s medical care ratio (expenses to premiums ratio) decreased by 60 basis points year-over-year to 80.9% in 2014. The company, however, benefited from exceptional growth across its divisions, particularly the Optum and Medicaid divisions.

In the past few months the company’s stock price has rallied past $100, hitting a new high of $109 after the strong earnings report. Below we review the company’s performance across its businesses for Q4 and full year 2014.

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Huge Gains In Medicaid

UnitedHealth ended the year with the addition of  over a million new customers, of which 135,000 came in the last quarter. At the end of 2014, the total number of people served by the company’s Medicaid division stood at just over 5 million. Revenues from the division jumped up by 29% year-over-year to about $24 billion in 2014. The fourth quarter in particular gave a significant boost as revenues during the period increased 37% year-over-year.

Medicare And Retirement

Revenues from Medicare grew by 5% year-over-year to over $46 billion in 2014, also registering similar growth during the fourth quarter. Under the Medicare Advantage product line, the company added around 15,000 new customers to cross the 3 million mark. This could have been higher, but the company lost around 150,000 of its customers as it exited some state markets due to inadequate government funding. The company added about 295,000 new members under the Medicare Supplement product line during the year, a growth of 9% for the full year. Of these, about 35,000 were enrolled in the last quarter.

Private Health Insurance

During 2014, UnitedHealth suffered a major setback with the loss of about 640,000 customers in its risk based portfolio. The company lost another 755,000 under its fee based product line. A decrease of about 10,000 customers in the TRICARE program also did not help the declining performance in the individual insurance business. As a result, revenues from this division fell by $1.8 billion to $43 billion. During the fourth quarter, revenues fell by over 6% year-over-year.

However, going forward the company aims to reverse the trend with stronger retention as well as greater participation in health exchanges during open enrollment periods. The company recently increased its presence to 23 health exchanges nationwide for the Open Enrollment Period 2015, including in Texas, Florida and Pennsylvania. This has already resulted in gains for the company, with 400,000 enrollments so far in the ongoing 2015 enrollment season. [3] The enrollment period will end on February 15, and has seen a significant spurt in enrollments this year, which crossed 7.1 million in the first nine weeks compared to just 8 million in the entire 2014 period. [4]

Optum – Star Performer Of 2014

The company’s Optum division has three subdivisions: OptumHealth, OptumInsight and OptmRx. Optum grew by 25% year-over year in terms of revenues, which totaled about $48 billion for 2014. Similar growth was recorded in the fourth quarter as well, posting 23% year-over-year growth in revenues to $13 billion. Better operating margins at 6.9% aided a 32% year-over-year growth in operating earnings, which was well beyond the company’s outlook for the year. In the fourth quarter, earnings shot up by 53% year-over-year with an operating margin of 8.1%.

International Growth Continues

UnitedHealth acquired Amil Participações SA, a Brazilian healthcare provider, in 2012 with the aim to capitalize on Brazil’s burgeoning middle class and Amil’s already established healthcare network. [5] During 2014, international operations saw a 9% year-over-year jump in revenues to $6.9 billion. This came despite the fact that the company faced a reduction in its membership base by 380,000 during the year due to increased pricing. However,  increased revenue yields and hospital services revenue growth helped offset the decline.

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Notes:
  1. SEC 8-K Filing, January 21 2015 []
  2. UnitedHealth Group’s (UNH) CEO Stephen Hemsley on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha []
  3. Fourth Quarter and Full Year 2014 Earnings Release, Investor Relations []
  4. Open Enrollment Week 9: January 10, 2015 – January 16, 2015, U.S. Department of Health and Human Services []
  5. UnitedHealth to Buy 90% of Brazil’s Amil for $4.3 Billion []