UnitedHealth Earnings: How Did Optum Perform In 2016?

UnitedHealth Group (NYSE:UNH), the largest health insurer in the U.S., operates two primary businesses – UnitedHealthCare and Optum. UnitedHealthCare includes the company’s private health insurance, Medicaid, and Medicare segments, while the Optum division covers services such as pharmacy benefits management (PBM) and health care services.

Optum has been the primary growth driver for the company in the last few years, and it continued to drive results in 2016 as well. In full year 2016, Optum revenues grew about 24% year-over-year (y-o-y) to $83.6 billion, driven by growth across all three sub-segments- OptumHealth, OptumInsight, and OptumRx. Optum Sub-Divisions

OptumHealth revenues grew by 21% y-o-y to about $17 billion in 2016 driven by a 6% increase in customers served to 83 million as well as a 14% y-o-y increase in the average revenue per customer to $54.20.

OptumInsight revenues grew by 18% to $7.3 billion in full year 2016, driven by growth in technology services, care provider revenue management services and payer service offerings. The segment’s revenue backlog also grew over 20% y-o-y, from $10.4 billion at the end of December 2015 to $12.6 billion at the end of December 2016.

OptumRx, UnitedHealth’s PBM business, reported revenue growth of 25% y-o-y to over $60 billion in 2016. The increase in revenue was driven by growth in pharma care services and recent acquisitions- Catamaran and Helios.

How OptumRx Impacts Top Line And Margins

OptumRx, UnitedHealth’s pharmacy benefits management (PBM) business, is the largest subdivision of the Optum business. Its share of revenues were at around 71% of total Optum revenues in 2015 and improved marginally to 72% by the end of 2016. This increase was primarily fueled by inorganic growth through the acquisition of Catamaran for $12.8 billion (deal completed in July 2015) and Helios (deal completed in January 2016).

In terms of profitability, OptumRx has considerably lower operating margin than other Optum segments. Compared to OptumRx’s operating margin of 5.1% in Q4 2016, OptumInsight and OptumHealth had margins of 26.8% and 9.3%, respectively.

Going forward, we expect Optum’s margins to remain under pressure as OptumRx’s share of Optum sales remains over 70%. However, we expect the negative impact to taper off over the next 4-6 quarters as OptumRx’s operating margin continues to improve. In the last year, the business’s operating margin improved 130 basis points to 5.1% in the quarter ending December 31, 2016.

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