Potential upside & downside to trefis price
UnitedHealth Group Company
- Optum (OptumHealth(Care Delivery), OptumInsight (Consulting), OptumRx (PBM)) constitutes 51% of the Trefis price estimate for UnitedHealth Group's stock.
- United HealthCare (Employment & Individual, Medicare, Medicaid, International) constitutes 49% of the Trefis price estimate for UnitedHealth Group's stock.
WHAT HAS CHANGED?Business Growth In Optum Division: Revenue from Optum division has been increasing 63% between 2016 and 2020. Of the three segments within the Optum subsidiary, Optum Health has exhibited the strongest growth with revenues increasing 135% over the same period. By the end of Trefis forecast period we expect Optum Health to touch $110 billion mark. If the division is able to post strong sales growth of over 15% annually across the three segments there is a 10% upside to the Trefis price estimate.
Coronavirus Crisis Impact On UnitedHealth's Business Despite the pandemic, UnitedHealth has managed to grow its revenues and earnings in 2020. Given the healthcare institutions focused on Covid-19 and other emergency patients, several types of elective surgeries were postponed in the first half of 2020. As such, UnitedHealth had to shell out a little amount on Medical costs, especially in Q2, resulting in higher profits, a trend which has reversed over the recent quarters after a pickup in total procedures volume.Also, UnitedHealth will likely see a pickup in private health insurance post Covid-19, with lower unemployment levels. The U.S. has already witnessed growth in the uninsured rate over the past few years. Currently, given the high unemployment, the company is seeing a shift from more lucrative corporate health insurance to Medicaid, but it is unlikely to see any significant customer loss.
Latest EarningsIn Q1 2021, UnitedHealth Group reported Total Revenues of $70.2 billion, up 9% y-o-y. This increase was driven by higher sales in both UnitedHealth and Optum segment, which grew 8% and 11% (y-o-y), respectively. Also, operating margin increased from 7.8% in the prior year quarter to 9.6% in Q1 2021. The growth in margins can partly be attributed to the company's efforts to improve efficiency and reduce costs, and the company's management stated that margins improvement is is sustainable for the long term. The company reported adjusted EPS of $5.31 per share as compared to $3.72 in the prior year quarter.
Outlook for 2021We forecast UnitedHealth Group to report $279 billion in Total Revenues for 2021, up by 8.5% as compared to 2020 and the earnings to be $18.27 on a per share basis, which compares with the company's provided guidance of $280 billion in total revenue and adjusted earnings per share in the range of $18.10 to $18.60.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICEBelow are key drivers of UnitedHealth Group's value that present opportunities for upside or downside to the Trefis price estimate for the company's stock:
- Total U.S. Medicare Enrollments: UnitedHealth Group’s Medicare & Retirement business is the biggest source of value, according to Trefis estimates. This segment contributes 35% to the company’s revenues and constitutes 22% of the Trefis price estimate. Medicare enrollments have hovered around 14.2 million over the recent years. Considering a low population growth rate of <1%, Medicare is poised to remain the strongest contributor. Medicare Advantage is a privately managed alternative to original Medicare, which is managed by the federal government. In the past few years, the market share of Medicare Advantage plans has been increasing, with UnitedHealth Group as the market leader. Strong market presence and diversified product portfolios have been drivers of this growth. We expect this growth to continue backed by the aging population and the growing penetration of Medicare Advantage plans.
- UnitedHealthcare's Private Insurance Market Share: UnitedHealthcare is currently the market leader in private health insurance sector with a market share of over 15%. However the competition is significant, with almost 1,300 companies operating in this segment. Establishment of public and private health insurance exchanges has intensified the competition. However, we expect the company to maintain its market share going forward. The company will benefit from its market leadership position and strong brand, consistent innovation and vast network. However if the market share falls to 10%, there is a potential downside of over 5% to the Trefis price estimate.
UnitedHealth Group ("UNH") is the largest health insurance company in the United States with consolidated revenue of $257 billion in 2020. Through its UnitedHealthcare and Optum subsidiaries, the company provides health benefits and health services to its customers. In 2020, the total number of customers served by Optum were over 98 million.Its UnitedHealthcare insurance subsidiary operates in four primary divisions:
The company's Optum subsidiary operates in three primary divisions:
- UnitedHealthcare Employment and Individual (Private Insurance): Provides health benefit plans and services to national employers, corporations, small businesses, and individuals.
- UnitedHealthcare Community and State (Medicaid): Provides managed care services to state Medicaid programs, which serve economically disadvantaged or medically under-served individuals.
- UnitedHealthcare Medicare and Retirement (Medicare): Provides privately administered Medicare services to retirees as Medicare Advantage(Part C). Along-with, it provides prescription drug plans(Part D) as supplementary services.
- UnitedHealthcare International: Provides healthcare services to governments, corporates, and individuals in more than 130 countries, with a strong presence in Brazil.
- OptumHealth: Provides a range of specialized health and wellness services such as mental health treatment, substance abuse treatment, and counseling to individuals.
- OptumInsight: The consulting division of United Health Group, provides data and analytics services, healthcare expertise and technology to clients from healthcare industry.
- OptumRx: A pharmacy benefits management business which processes prescription drugs for its customers through network pharmacies and helps them to manage costs.
SOURCES OF VALUE
UnitedHealthcare Employment and Individual is the most valuable business for UnitedHealth Group primarily due to its market leadership position. We expect this business to grow steadily in the future as a result of greater nationwide health insurance coverage as well as its dominant position in the market. However, we expect even more rapid growth in the Medicaid business as a result of the following factors:
Increase in total Medicaid enrollments: Following the implementation of the PPACA there has been a significant expansion in Medicaid availability as the eligibility requirements were relaxed. Under the new criteria, individuals under 65 with income of up to 133% of the existing poverty line are able to obtain health benefits from state-run Medicaid programs. According to projections from the Centers for Medicare and Medicaid Services (CMS) nearly 66 million additional Americans will be eligible for Medicaid by 2023. Given UnitedHealth Group's market leadership position and its existing footprint within the Medicaid managed care market, we expect that it will be able to capitalize on this secular trend and increase its enrollments substantially. Now, with the new government elected in 2021, the focus appears to be on the healthcare system, and this may result in an expansion of Medicaid base.
Implementation of Patient Protection and Affordable Care Act (PPACA): The PPACA, colloquially known as "Obamacare," is a healthcare reform bill passed into law in 2010. The purpose of the law is to reduce healthcare costs and expand healthcare coverage among Americans. It includes an individual mandate, which penalizes individuals who can afford health insurance but choose not to purchase it. It also expands the availability of Medicaid, restricts the ability of insurers to refuse service to customers with pre-existing conditions, will introduce health insurance exchanges in order to encourage competition in the market, and will regulate premiums and medical care ratios (medical costs/premiums) of health insurers. In the second open enrollment period 11.4 million customers purchased health insurance on health insurance exchanges. According to government estimates, 30 million Americans will participate on these exchanges by 2018 and we expect that UnitedHealth Group will benefit significantly from the increase in enrollments. UNH however, decided to pull out of PPACA from most of the states due to decline in company's profits. So, even if the new government brings were to repel PPACA, UNH will not be affected significantly.
Pandemic Will Impact Growth
Private health insurance enrollments have seen a decline during the pandemic, as unemployment levels increased. The 2020 pandemic has adversely effected the economic growth as well. If economic conditions were to further deteriorate, we expect employer-sponsored health coverage to decline, as well as the quality of those plans (which usually brings higher premiums).