UnitedHealth Group (NYSE:UNH) is the largest health insurer in the U.S., accounting for over 14% of the total private health insurance enrollments in the country. With strong fundamentals and market position, UnitedHealth is well placed to capitalize on the increase in market size brought on by the implementation of the Patient Protection and Affordable Care Act (PPACA), or commonly known at Obamacare.
The PPACA was signed into law by President Barrack Obama in March 2010, to increase health insurance coverage and affordability amongst the uninsured in the U.S. Around 30 million Americans are currently not covered by any form of health insurance.  The act offers subsidies to low income individuals and families with income below the federal poverty level and also requires policies to be issued regardless of community rating or medical condition. Insurers are required to offer the same premium to all insured parties of the same age and location, regardless of gender or pre-existing condition.
Other important reforms included within the act include the setting up of health insurance exchanges in each state allowing individuals and businesses to compare policies and premiums and choose the one best suited for them, as well as the employer mandate which requires companies with 50 or more employees to provide affordable insurance to their employees. The PPACA has also established a minimum medical care ratio (medical costs divided by premiums) for health insurance providers like UnitedHealth. The minimum ratio mandated by the act is 80% for individual and small group plans, and 85% for large group plans.
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The act brings both positives and negatives for UnitedHealth. While the company is likely to benefit from increased enrollments and insurance penetration in the U.S., it might also lose market share due to the setting up of insurance exchanges. The regulations governing the medical care ratio will lead to a decline in the company’s margins. Our $76 price estimate for UnitedHealth’s stock is in line with the current market price.
UnitedHealth’s Insurance Operations
UnitedHealth’s U.S. health insurance operations can be divided into three divisions: Employer and Individual insurance, Medicare and Retirement division and Medicaid Managed Care division. The three combined account for nearly 80% of the company’s revenues and EBITDA.
The Employer and Individual insurance division offers insurance plans for individuals and employers covering their employee’s insurance plans. The two categories of services offered by UnitedHealth are 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. This division accounts for 35% of the company’s revenues and 38% of its EBITDA. There are around 190 million private health insurance enrollments in the U.S., of which 26 million are enrolled with UnitedHealth.
The Medicare and Retirement branch provides health care insurance plans to senior citizens and eligible younger people with disabilities, administered by the Centers for Medicare and Medicaid Services (CMS). The company provides coverage in return for a fixed monthly premium per member served from CMS. This division accounts for 30% of the company’s revenue and 32% of the EBITDA. UnitedHealth primarily uses the American Association of Retired Persons (AARP) as a distribution medium, offering a range of health insurance plans to the 37 million members of the association. There are around 50 million Medicare beneficiaries in the U.S. and UnitedHealth has a market share of over 20%.
Medicaid is a U.S. government program which provides healthcare for economically disadvantaged, medically underserved people and those without the benefit of employer benefit plans. UnitedHealth’s Medicare Managed division provides managed care solutions and insurance coverage to Medicaid beneficiaries. In return for the services and coverage provided, the insurer receives a monthly premium per member from the applicable state. UnitedHealth has a market share of around 10% of the 40 million Medicaid enrollments in the U.S. The company earns around 12% of its revenues and EBITDA from this division.Notes:
- FACT SHEET: The Affordable Care Act: Secure Health Coverage for the Middle Class, The White House, Office of The Press Secretary [↩]