Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry.
By Jonathan Block, Editor
July 23, 2012 Volume 22 Issue 26
UnitedHealth Group has again turned out impressive quarterly earnings, with profit rising 5.5% in the second quarter year-over-year and the insurer boosting its full-year earnings guidance. But CEO Stephen Hemsley, while saying the carrier expects growth to continue, warned during a July 19 conference call of a “challenging environment” due to stagnating Medicare reimbursement, constrained state Medicaid budgets and an increasingly competitive commercial insurance market.
However, the executive somewhat mitigated those comments by emphasizing the insurer’s Optum health services division and the high level of growth the company expects from that unit in coming years.
“There continues to be more downward than upward pressure across the health care landscape,” Hemsley said, adding that he expects the situation to continue for some time due to “employment malaise and imminent regulatory changes.” Hemsley’s comments may have spooked some investors, as UnitedHealth shares fell 2.4% at the close of trading July 19.
“While we’re executing well, we remain cautious because pressures on the benefits market remain significant and continue to build,” he said. “Great pressures in government programs are intensifying, and rates in some Medicaid venues are even slightly negative,” he added, noting that Medicare Advantage rate increases have been minimal for at least three years.
United Is Cautious About Future
Despite Hemsley’s concerns, UnitedHealth increased its 2012 earnings per share guidance to a range of between $4.90 and $5.00, up from a prior estimate of between $4.80 and $4.95. And by and large, analysts welcomed the results as a good start to the second-quarter earnings season.
UnitedHealth’s first-quarter net income grew to $1.34 billion ($1.27 per share), beating Wall Street’s consensus of $1.19 per share. Overall revenues for the quarter were $224.6 billion, a 7.9% year-over-year increase. UnitedHealth’s results were also helped by strong enrollment growth — the insurer added 1.7 million more members year over year — and a consolidated medical loss ratio (MLR) of 81.3%, a slight drop of 0.1 percentage point compared with the prior-year quarter.
“United’s earnings should ease fears about rising utilization and a turn in the underwriting cycle,” Citigroup Global Markets analyst Carl McDonald said in a July 19 note to investors.
However, Matt Coffina, a health care analyst with Morningstar, Inc., tells HPW that although UnitedHealth traditionally has been seen as a bellwether for the rest of the industry, that isn’t so much the case anymore.
“One company’s earnings doesn’t necessarily predict others’” results in terms of MLR, health care cost trends and other measures. As an example, he cites WellPoint, Inc.’s recent woes in the Medicare segment, an area United has done well in for many quarters (HPW 1/30/12, p. 1). In addition, while UnitedHealth’s first-quarter 2012 earnings were also strong, other insurers’ were lackluster. For example, Aetna Inc.’s first-quarter profit fell 13% year over year (HPW 4/30/12, p. 1).
Medicare, Medicaid Enrollment Grows
Membership gains were a strong suit for UnitedHealth in the second quarter. Overall medical membership increased 5% year over year to stand at nearly 35.9 million at the end of the quarter. The segments with the largest percentage increases were Medicare Advantage (MA) and Medicaid. MA enrollment rose 18% to 2.58 million at the end of the quarter, while Medicaid was up 14% to 3.8 million. Commercial enrollment rose a more modest 2.8% to 26.4 million. The carrier expects to add between 1.8 million and 2 million more consumers by the end of the year.
United’s membership growth was due in large part to the June acquisition of two Florida-based senior-focused plans, Preferred Care Partners and Medica HealthCare Plans, as well as new Medicaid implementations and awards so far this year in Kansas, Louisiana, Washington and Texas (HPW 3/5/12, p. 7). In Ohio, the insurer won both Medicaid and dual eligible awards (HPW 6/11/12, p. 8).
“We anticipate continued steady growth next year as well, because of the ongoing entrance into Medicare of millions of baby boomers and our expanding market presence,” Hemsley added.
‘Exponential’ Growth Projected for Optum
During the call, Hemsley highlighted the results of Optum, saying that the market for health services is just beginning to ripen. Total revenues for the unit rose to $7.3 billion from $7 billion year over year, but earnings fell 5.9% to $320 million, due to investments to develop the divisions, a reduction in Medicare Part D business, and the transition of the insurer’s commercial pharmacy benefit management operations to OptumRx. United is building up OptumRx rather than renewing a contract with Medco Health Solutions, Inc. (now part of Express Scripts Holding Co.) that expires at the end of the year (HPW 8/1/11, p. 1).
Hemsley is bullish on Optum’s future, saying that while he foresees the health benefits market expanding “steadily,” he predicts the health services market will rise “exponentially.”
Coffina says he expects Optum will account for a larger percentage of earnings going forward as growth in health benefits will be relatively modest by comparison.
“I think that there is huge opportunity in health services that is untapped so far,” Coffina tells HPW. “There’s only so much you can grow in health benefits [and] United also already has a pretty decent market share.” Moreover, the Optum unit provides the carrier with differentiation from the health benefits side and better capabilities that can be used to improve health outcomes, both of which might enable UnitedHealth to gain more clients, he adds.
Coffina also predicts that other large insurers will want to increase their share of revenues from non-regulated sources to become more diversified, as well as to keep up with competitors.
And UnitedHealth may have not tapped Optum’s full potential yet, says Dan Mendelson, president of Washington, D.C.-based health consulting firm Avalere Health, LLC.
“They can get more heavily into more clinical aspects of data, they could be more involved in identifying biomarkers, and using the genome’s predictive powers,” he tells HPW. “There are ways of building on the Optum asset that are different and exciting, that would go beyond the way they have built the asset to date.”
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