UnitedHealth Group (NYSE:UNH) is scheduled to report earnings for the third quarter of 2013 on Thursday, October 17.  The health insurance company reported a 12% increase in revenues for the second quarter of the year, helped by 9.1 million new enrollments through the first half 2013. The company’s results were also helped by the health services business, Optum, which reported a 21% revenue growth last quarter. We expect UnitedHealth to maintain the momentum through this quarter and will be keeping a close eye on the company’s preliminary performance on the recently launched health insurance exchanges opened under the Patient Protection and Affordable Care Act (PPACA). 
Our $75 price estimate for UnitedHealth’s stock is in line with the current market price.
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Too Early To Make A Call On PPACA Exchanges
Despite the Federal Government shutdown, the Federal website for health coverage (http://www.healthcare.gov) went live in early October along with various state health insurance websites. The exchanges are aimed to make insurance more affordable and accessible to uninsured and under-insured U.S. citizens. The 2010 U.S. census revealed that 83% of U.S. citizens are covered by health insurance.  Around 7 million Americans are expected to enroll in health insurance plans by 2014, with an additional 8 million citizens enrolling in the government-run Medicaid program. 
UnitedHealth is the largest health insurer in the U.S., accounting for nearly 15% of the total private health insurance enrollments in the country and 10% of the total Medicaid enrollments. Although it is too early to see the full impact of the implementation of the PPACA on UnitedHealth, we believe the company will see increased enrollments in the coming years. However, the opening of the exchanges might lead to a loss of market share as customers will now have more options to choose form.
Optum Looks Promising
UnitedHealth’s Optum division, which consists of OptumHealth, OptumInsight and OptumRx, accounted for 23% of the company’s operating earnings through the first six months of 2013, with the figure surging 80% over the prior year. OptumHealth reported a 110% increase in EBIT for the first half of 2013, accounting for more than 40% of the Optum division’s earnings while OptumInsight and Optum RX reported a 66% and 58% increase respectively. The contribution to EBIT from these divisions was roughly 30% each.
Optum provides health services to individuals, employers, government as well as life sciences companies and has three segments. OptumHealth primarily provides health and wellness services such as behavioral solutions, care solutions, financial services, collaborative care and logistics health, covering over 61 million individuals across the U.S. OptumInsight provides software and information products and services as well as advisory and outsourcing services to clients. The division primarily caters to hospitals and physicians as Medicaid and Medicare administrators.
OptumRx is responsible for processing and paying prescription drug claims of its clients. It offers pharmacy benefits management (PBM) services to more than 14 million people nationwide. The division reported 8 million new customers through the first six months of 2013, driving the aforementioned growth in earnings. A large chunk of Optum’s revenues come from inter-segment transactions, through sales of pharmacy benefit products and services to customers enrolled in private health insurance or Medicare plans. Three-fourths of the Optum division’s revenues through the first six months of the current year were through inter-segment transactions. Therefore, we expect a high correlation between the growth in Optum revenues and enrollments in the insurance divisions.
Meanwhile, In Brazil
UnitedHealth announced the acquisition of Brazilian insurer Amil S.A. in October 2012. The company had around 4.4 million international enrollments at the end of 2012, but reported an increase to 4.7 million through the first half of 2013. The division currently accounts for just 1% of the company’s revenue, but has the potential to expand exponentially in the coming years.Notes: