Key Factors Driving UnitedHealth Group’s Medicaid Managed Care Business

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Medicaid Managed Care accounts for over 15% of our price estimate for UnitedHealth Group’s (NYSE:UNH) stock value. The division recorded unprecedented growth in enrollments in 2014, adding over a million new Medicaid customers, about 2% higher than the previous year. At the end of 2014, the total number of people served by the company’s Medicaid division stood at just over 5 million. [1] This resulted in a 29% year-over-year spike in the division’s  revenues to about $24 billion in 2014, as the company continued to benefit from an expanding market.

Medicaid Managed Care is a program through which Medicaid beneficiaries receive coverage through a private managed care organization (MCO) such as UnitedHealth. In return for the services and coverage provided, the insurer receives a monthly premium per member from the applicable state (Medicaid is financed by individual states as well as the federal government).

In this note we review the key factors that will drive the company’s Medicaid Managed Care business. We have a price estimate of $105 for UnitedHealth’s stock, which is about 10% lower than the current market price.

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Expect Healthy Growth

We currently forecast the strong growth to continue, with UnitedHealth expected to add more than half a million new customers in 2015. This would roughly translate to a 12% market share in the U.S. for the company by the end of the year. In the long term, the company is well positioned to cross 8.5 million enrollments by the end of our forecast period. There is a potential upside of 10% to our price estimate if the company is able to increase its market share to about 21%, meaning total enrollments rise to about 13 million by the end of our forecast period.

Provisions in the Affordable Care Act have laid the groundwork for the expansion of Medicaid, and we expect the total number of Medicaid managed care enrollments to consistently grow throughout our forecast period and cross the 61 million mark by 2021. UnitedHealth will benefit from the growth in its addressable market, as well as its expansive network and competitive pricing structure to sustain the growth momentum in the division. Currently, UnitedHealth has just over 11% share in the Medicaid managed care market in the U.S. making it a leading player in this space. We believe that UnitedHealth is well-positioned to take advantage of favorable trends in the market. 

But Certain Risks Will Persist

There are a few key risks that could hinder UnitedHealth’s growth in the Medicaid managed care business. Firstly, as economic conditions improve and unemployment declines (unemployment rate fell to 5.5% in February 2015) the proportion of the U.S. population making less than 138% of the poverty line (the cutoff for Medicaid eligibility) will decline, thus limiting growth in Medicaid enrollments. According to the Kaiser Family Foundation estimates, a 1% increase in the unemployment rate results in an additional 1 million Medicaid enrollments. [2] However, this will be offset by the potential growth in the company’s Private Health Insurance business as these former Medicaid beneficiaries will now have to purchase health insurance (or have it provided by an employer). Secondly, the PPACA is leading to a greater level of competition on the health insurance exchanges. Lastly, the PPACA mandates a minimum medical care ratio, or the ratio of medical expenses to premiums, which will limit its ability to raise premium rates. Going forward we will be closely following UnitedHealth’s progress as well as any developments that will impact the segment.

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An increasing number of states are encouraging, or even requiring, their Medicaid beneficiaries to enroll in managed care plans. As such we expect that a majority of new Medicaid beneficiaries will be managed care enrollees.
Notes:
  1. SEC 10-K Filing []
  2. Key Information on the Nation’s Health Coverage Program for Low-Income People, Kaiser Family Foundation []