UnitedHealth Earnings Climb On Higher Enrollments

UnitedHealth Group (NYSE:UNH) reported strong earnings for the second quarter of 2013 as revenues grew 12% over the prior year’s figure. Growth was driven by the addition of 9.1 million consumers through the year ending June 30, of which 4.4 million were in the U.S. and 4.7 million in international operations in Brazil. Although the company saw growth in all segments, its results were particularly helped by the health services business, Optum, which reported a 21% year-on-year increase in revenues. The division’s operating earnings have increased by 80% through the first half of the year, crossing the $1 billion mark. The division now accounts for nearly 30% of the company’s revenues. UnitedHealth initiated services for TRICARE, the health care program for active and retired U.S. military personnel and their families in the west region, during the second quarter. This led to an addition of 2.9 million members.

UnitedHealth’s stock jumped 6.5% after the company reported earnings, and is now in line with our $70 price estimate. UnitedHealth affirmed its projections for 2013, with revenues expected to come in around $122 billion and cash flows between $7.2 billion and $7.6 billion.

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UnitedHealth’s employer and individual division, which is the company’s largest business, reported 2.8 million new enrollments in the second quarter leading to a net gain of 235,000 consumers year-to-date. However, the division’s revenues decreased by $417 million as the company converted 1.1 million risk-based members of a public sector client to a fee-based arrangement. UnitedHealth expects a $2.5 billion decline in annual revenues due to this conversion.

The employer and individual division accounts for 35% of the company’s revenue, and around 40% of its EBITDA. 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.  Please read our article: A Look At UnitedHealth’s Private Health Insurance Business for more on this division.

The Medicare and Retirement division reported a 13% increase in revenues through the second quarter driven by a 17% increase in enrollments in the Medicare Advantage program. Around 55,000 seniors joined Medicare Advantage in the second quarter of 2013. Medicare Supplement reported a 9% year-on-year increase in enrollments with 40,000 people joining in the second quarter. The Medicare Part D drug plan reported a strong growth of 90,000 people in the three months ending June.

The Medicare division provides health care insurance plans to senior citizens and eligible younger people with disabilities administered by the Centers for Medicare and Medicaid Services (CMS) and accounts for 30% of the company’s revenue and 32% of the EBITDA. UnitedHealth has a market share of over 21% in the U.S. market. UnitedHealth expects an annual influx of around 3 million people in the Medicare program in the coming years, and is well positioned to capitalize on the growth in market size.

Although the implementation of the Affordable Care Act will grow in terms of expansion in enrolments, it is also expected to lead to government underfunding of the Medicare Advantage plan, designed to help out senior citizens as well as nondeductible taxes leading to pressure on margins. Government funding is expected to be at par with the basic fee-for-service program by 2016. Unlike the Medicare program, the fee-for-service model offers unbundled services which are each paid for separately. Once the funding is level, the Medicare system will have an advantage over the fee-for-service system, leading to accelerated growth from 2016 onwards.

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