UnitedHealth Earnings: How Did Optum Perform In Q3 2016?

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UnitedHealth Group

UnitedHealth Group (NYSE:UNH), the largest health insurer in the U.S., operates two primary businesses – UnitedHealthCare and Optum. UnitedHealthCare includes the company’s private health insurance, Medicaid, and Medicare segments, while the Optum division covers services such as pharmacy benefits management (PBM) and health care services.

Optum has been the primary growth driver for the company in the last few years, and it continued to drive results in the third quarter of 2016, as well. In Q3 ending September 30 2016, Optum revenues grew over 9% year-over-year (y-o-y) to $21.3 billion, driven by growth across all three sub-segments- OptumHealth, OptumInsight, and OptumRx. unh-19

Optum Sub-Divisions

OptumHealth revenues grew by 23% y-o-y to $4.3 billion in the third quarter driven by a 7% increase in customers served to 81 million as well as a 15% y-o-y increase in the average revenue per customer to $53.50. unh-11

OptumInsight revenues grew by 15% to $1.8 billion, driven by growth in technology services, care provider revenue management services and payer service offerings. The segment’s revenue backlog also grew from $9.8 billion at the end of September 2015 to $12.6 billion at the end of September 2016.

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OptumRx, UnitedHealth’s PBM business, reported revenue growth of 6% y-o-y to over $15.2 billion in Q3 2016. The increase in revenue was driven by a 12% increase in script fulfillments.

How OptumRx Impacts Top Line And Margins

OptumRx, UnitedHealth’s pharmacy benefits management (PBM) business, is the largest subdivision of the Optum business. Its share of revenues increased from 65% of total Optum revenues in Q2 2015 to 75% by the end of Q4 2015 but has since declined to 71% in Q3 2016. This increase was primarily fueled by inorganic growth through the acquisition of Catamaran for $12.8 billion (deal completed in July 2015) and Helios (deal completed in January 2016).

However, the increased proportion of OptumRx in overall Optum sales negatively impacted the division’s margins, as OptumRx has considerably lower operating margin than other Optum segments. Compared to OptumRx’s operating margin of 4.5% in Q3 2016, OptumInsight and OptumHealth had margins of 20.3% and 9.3%, respectively.

Going forward, we expect Optum’s margins to remain under pressure as OptumRx’s share of Optum sales remains over 70%. However, we expect the negative impact to taper off over the next 4-6 quarters as OptumRx’s operating margin continues to improve. In the last year, the business’s operating margin improved 110 basis points to 4.5% in the quarter ending September 30, 2016. unh-20


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