A Look At UnitedHealth’s Private Health Insurance Business

by Trefis Team
UnitedHealth Group
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Private health insurance, or Employer & Individual insurance, is UnitedHealth Group’s (NYSE:UNH) biggest business, accounting for 35% of the company’s revenues and 38% of its EBITDA. Through this division, the company offers insurance plans for individuals and employers covering their employees’ insurance plans. Two types of services are offered by the insurer: commercial risk-based insurance, which covers the risk associated with medical as well as administrative costs within the premiums received; and commercial fee-based insurance, which covers only administrative and managerial services. Commercial fee-based insurance is usually chosen by large companies which self-fund the healthcare costs of their employees.

UnitedHealth is the largest private health insurance provider in the U.S. accounting for over 14% of the total private health insurance enrollments in the country. The Patient Protection and Affordable Care Act (PPACA) is expected to drive growth in private enrollments in the coming years. The act brings both positives (in terms of increased enrollments) and negatives for (in terms of lower margins) for UnitedHealth.

Our current price estimate for UnitedHealth stands at $70, implying a 10% premium to the current market price.

See Full Analysis For UnitedHealth Group Here

Increased Health Insurance Penetration

Around 30 million Americans are currently not covered by any form of health insurance. [1] The PPACA includes provisions for providing affordable health insurance to these citizens. The act requires policies to be issued regardless of community rating or medical condition with insurers offering the same coverage to all insured parties of the same age and location regardless of gender or pre-existing condition. The act also offers subsidies to low income individuals and families with income below the federal poverty level.

To estimate the total number of enrollments in the coming years, we must take demographics into account. The 2010 U.S. census revealed that 83% of U.S. citizens are covered by health insurance. Around 65% are privately insured while 15% are covered by Medicare or Medicaid. [2] Assuming a constant U.S. population growth rate of around 1%, the country’s population will be about 314 million by 2019.

From this estimate, we must subtract people over the age of 65, who are covered by Medicare. There were about 35 million American citizens in the 55 to 64 age group in 2010, according to the 2010 U.S. census. The mortality rate for senior citizens in the 65 to 74 years age group is around 2% and around 5% for citizens in the 75 to 84 years age group. [3] Using these statistics, we can approximately assume close to 50 million senior citizens by 2019.

From these calculations, the total number of people who can be insured by 2019 will be about 264 million. Assuming the PPACA is fully implemented, achieving a 90% insurance penetration, the total number of enrollments by the end of our forecast period would be around 237 million. However, given the difficulties in implementing the act across the nation, we have assumed a penetration of 75%, giving us a figure of 200 million private health enrollments by 2019.

UnitedHealth To Lose Market Share

The PPACA will establish health insurance exchanges in each state, allowing individuals and businesses to compare policies and premiums and choose the one best suited for them. Although UnitedHealth is currently the market leader in the U.S., it competes with over 1,300 health insurance companies for market share. We expect the establishment of exchanges, coupled with strong competition from companies like Cigna and Wellpoint, to lead to a long-term decline in market share for UnitedHealth. However, growth in the overall market will also benefit UnitedHealth, leading to an increase in policyholders from about 26 million to close to 30 million according to our estimates.

Margins To Decline

In order to ensure affordable health care, the PPACA mandates a minimum medical care ratio (medical costs divided by premiums) of 80% for  individual and small group plans, and 85% for large group plans. Medical costs account for more than 80% of UnitedHealth’s operating expenses (excluding depreciation and amortization) and the company has maintained a medical care ratio of about 80% for the last three years, allowing its EBITDA margins to stay around 9%. A medical care ratio of 85% would drive the EBITDA margin to as low as 4%. However, the company has undertaken several cost cutting measures to reduce operating costs, and we also expect the mix of group and individual plans to allow the company to maintain a medical cost ratio of around 82-83%. This would imply EBITDA margins of about 7% in the coming years.

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  1. FACT SHEET: The Affordable Care Act: Secure Health Coverage for the Middle Class, The White House, Office of The Press Secretary []
  2. Health Status by Selected Characteristics and Health Insurance Status: 2010 []
  3. National Vital Statistics Reports, Centers for Disease Control And Prevention []
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