netrashetty
Netra Shetty
United Technologies Corporation (UTC) (NYSE: UTX) is an American multinational conglomerate headquartered in the United Technologies Building in Hartford, Connecticut.[1] It researches, develops, and manufactures high-technology products in numerous areas, including aircraft engines, helicopters, HVAC, fuel cells, elevators and escalators, fire and security, building systems, and industrial products, among others. UTC is also a large military contractor, producing missile systems and military helicopters, most notably the UH-60 Black Hawk helicopter.[2] In 2005, it received over $5 billion in military contracts. Louis R. Chênevert is the current CEO.[3]
UnitedHealth Group (NYSE: UNH) is the parent company of various other health services organizations and health insurers. With $87.1 billion in revenue in 2009, UNH is the second-largest publicly traded health insurance company in the United States.[1] As such, it has significant scale advantages that extend across its major product lines, allowing it to attract new member hospitals as well as negotiate for lower prices.
The company generates 90% of its revenues through three health insurance organizations: one for private clients, one for Medicare recipients, and one for Medicaid beneficiaries.[2] The government-sponsored clients represent an important source of business for UNH, so the current national health care debate could heavily impact United's operations. United has a number of other products and services, the most significant of which is its Ingenix, a data gathering and analysis division. United uses the data to evaluate the effectiveness of its doctors and hospitals; the company also sells the information to other health industry professionals. In 2008, UNH acquired three companies--Unison Health Plans, Sierra Health Services, and Fiserv Health-- for $4.2 billion.
Company Overview
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 FY2010 Q2 Earnings Summary
1.3 FY2010 Q3 Earnings Summary
1.4 FY2010 Q4 Earnings Summary
2 Key Trends and Forces
2.1 Healthcare Reform will have a Material Effect on UNH's Operations
2.2 Rising Healthcare Costs and Unemployment Put Pressures on Earnings
2.3 Consumerism Educates Consumers About Health Options which Lead to Lowered Medical Costs
2.4 Generic Drugs Pressure on Pharmaceuticals is Helpful for UNH's Proftability
3 Competitive Comparison
4 References
United Health Group consists of many separate divisions, which offer a wide range of products and services geared toward the health care industry. Health insurance service is by far the most important part of United's operations. These insurance divisions essentially sell protection from risk: as insurers, they agree to pay for a percentage of their customers' medical expenses in exchange for a fee, called the premium. The basic business plan is to offer clients a premium based on the the expected cost of caring for them, plus a markup for administrative costs and profit. Approximately 90% of UNH’s revenues are derived from health insurance services.[2] United has three subsidiaries that provide health insurance: United Health Care, Ovations, and Americhoice. United Health Care sells to individuals and companies, Ovations provides Medicare benefits, and AmeriChoice handles Medicaid clients.
In addition, United has a number of other products and services, the most significant of which is its Ingenix," the research wing of the company that gathers and analyzes company data, as well as data about the health care industry as a whole. The company uses the data for its own purposes and also sells the information to other players in the health care industry. Ingenix's main customers are medical device manufacturers, health insurance providers, and health care professionals. The data management techniques are an important part of UNH's consumerism campaign to provide more efficient service and to foster stronger relationships with its clients. Moreover, as the industry leader by enrollment, UNH has only limited opportunities to expand its business by taking on more members. Instead, it can grow by developing new lines of products and services.
Business and Financial Metrics
In Q1 2010, United’s net income jumped 21% over Q1 2009 to $1.19 billion. While revenues increased by 5.4% to $23.2 billion, net margins increased from 4.5% to 5.1%. This was thanks to a medical loss ratio (percent of premium revenue spent on medical costs) of 81.3% in the quarter, down from 82.4% the previous year. The company cited a mild flu season and strong expense management. [3] However, the strong performance has analysts worried that UNH will draw unwanted political attention.[4]
For the year ended on December 31, 2009, United’s revenues totaled $87.1 billion, up 7.3% compared to the previous year, while fourth quarter revenues of $21.8 billion also advanced 7 percent year-over-year. Yet operating income was basically the same, at $6.36 billion in 2009, as its operating margin fell from 7.8% in 2008 to 7.3% in 2009. [5]
In the following table, AmeriChoice, Ovations, and Commercial Markets revenue have all been consolidated as Premiums:
UNH's Revenue for FY 2006-2009 (Dollars in millions)
[6] 2006 2007 2008 2009
Premiums $65,666 $68,781 $73,608 $79,315
Services 4,268 4,608 5,152 5,306
Products 737 898 1,655 1,925
Investment and Other Income 871 1,144 771 592
Total Revenue 71,542 75,431 81,186 87,138
FY2010 Q2 Earnings Summary
United Health posted a net income of $1.12 billion, or $0.99 EPS for the second reporting quarter of FY2010, an increase of 30.4% compared to same period FY2009. Revenues for the second quarter came to $23.3 billion, a 7% rise compared to second quarter FY2009.[7] Out of total revenues, Health-benefits rose 7%, which was attributed to the growth of 1.1 million people in the public and senior markets, which therefore partially offset the 0.4 million decrease in people insured by the commercial-benefits market due to the increase in U.S. unemployment.[8] However, these gains, as seen by almost all major health insurers may be derived by the fact that claims from previous quarters came in much lower than expected. This is specifically because flu season was much milder than anticipated, and that the swine flu scare was less intense than anticipated.[9]
Net profit margin for United Health increased to 4.8% from 4% year earlier, which was helped further by cost management on top of the increase in revenues, but the increase in net profits also created bearish pressure for investors who worried that "the fatter insurance profits, the bigger a target they'll be for regulators."[10] Overall, the company's total enrollment grew by 1% to 32.5 million, especially in the Medicare and Medicaid business.
FY2010 Q3 Earnings Summary
UNH reported third quarter results of net income of $1.27 billion ($1.14 EPS) in the third reporting quarter of FY2010, a 23% increase compared to $1.04 billion in third quarter FY2009.[11] The $1.14 EPS beat anlyast expectations of $0.84 earnings per share. Revenues were also up 9% to $23.67 billion compared to same quarter last year.[12]
However, UNH's outlook for FY2011 is gloomier; specifically, continued unemployment, tighter city and state budgets, and tighter state funding for the Medicaid program would all reduce operating revenue and bottom line for FY2011.[13] Specifically, as health insurers such as UNH will be required to meet minimum medical loss ratios (MLRs) or provide refunds to consumers. MLRs are measured by the percentage of customers' premiums against that of the medical claims spent by insurers.[14]
FY2010 Q4 Earnings Summary
UNH posted earnings of $1.04 billion or $0.94 EPS in the fourth reporting quarter of FY2010, a 10% increase compared to $944 million or $0.81 EPS in the same quarter last fiscal year.[15] Quarterly revenue for UNH reached $24.03 billion compared to $21.78 billion same quarter last year. This figure beat analyst predictions of $0.84 EPS, as UNH's medical-loss ratio totaled 79.6% for the fourth quarter, an improvement of 1.7%. Beyond this, UNH's net margins also improved by 50 basis points to 4.9%.[16]
By maintaining strong enrollment growth, UNH was able to counter pressuring hospital operators given the soft U.S. economy and employment picture.[17] In terms of business segments, commercial enrollment was up to 24.8 million from 24.7 million one year ago primarily because of greater enrollment in commercial risk-based insurance.[18]
Key Trends and Forces
Healthcare Reform will have a Material Effect on UNH's Operations
On March 30, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, the much awaited and much debated health reform law. Several of its provisions will affect UnitedHealth and other insurers. The overall effect, however, remains to be seen.
The law includes a large number of health-related provisions to take effect over the next four years, including expanding Medicaid eligibility, subsidizing insurance premiums, providing incentives for businesses to provide health care benefits, prohibiting denial of coverage/claims based on pre-existing conditions, establishing health insurance exchanges, and support for medical research. The costs of these provisions are offset by a variety of taxes, fees, and cost-saving measures, such as new Medicare taxes for high-income brackets, taxes on indoor tanning, cuts to the Medicare Advantage program in favor of traditional Medicare, and fees on medical devices and pharmaceutical companies; there is also a tax penalty for citizens who do not obtain health insurance (unless they are exempt due to low income or other reasons).[19]
The expansion of Medicaid together with the health insurance mandate and premium subsidies are projected expand insurance to 32 million Americans without coverage. United stands to benefit from this, as the one of the largest insurers as well as the largest government contractor for administering Medicaid (UNH’s AmeriChoice program brings in $6 billion annually).[20]
The law ends will end the practices of refusing to cover patients with pre-existing conditions. This will likely lead to an increase in premium costs; however, given that the rule applies across the board, it may not hurt insurers’ competitive positioning.
Cuts to Medicare Advantage program reimbursements may hurt UNH, with its 2.0 million MA enrollees as of March 2010 [21], in the short term. In the long term, UNH may lose out still more: as MA beneficiary premiums increase to reflect lower government reimbursements, Medicare patients may migrate to less profitable Prescription Drug Plans and opt to receive their medical benefits from the traditional government-run Medicare program.
The health care law will also effectively begin to cap insurance company profits in 2011. Insurers will be required to spend 85% of large-group and 80% of small-group plan premiums on medical costs, or else improve health-care quality or return the difference to customers in the form of a rebate. In Q1 2010, United’s net income jumped 21% over Q1 2009 thanks to a medical loss ratio (percent of premium revenue spent on medical costs) of 81.3% in the quarter, down from 82.4% the previous year. [22] Under the new law, such a performance will not be possible again in 2011. Moreover, the strong performance has analysts worried that UNH will draw unwanted political attention amid continuing negative political sentiment directed at insurers.[23] However, insurer Wellpoint reportedly reclassified certain administrative expenses--$500 million dollars worth--in a way that increased its medical loss ratio. In January, WellPoint began costs such as as nurse hotlines, "medical management," and "clinical health policy," under medical benefits. [24] Thus, the impact remains to be seen.
Rising Healthcare Costs and Unemployment Put Pressures on Earnings
Rising healthcare cost is a major concern for health insurance companies, and trends show healthcare costs for U.S. businesses rising 9% in 2010. These rising medical costs combine with the recession and increased unemployment to create a "tug-of-war" between the need to raise premiums and the downtrend on enrollment and willingness of consumers and business to pay high premiums.[25] These competing pressures are having the overall effect of lowering UnitedHealth Group's revenues and margins. UnitedHealth Group's ability to mitigate the negative effects of rising healthcare and unemployment will be critical to it's ability to maintain strong earnings and compete in the health insurance industry.
Consumerism Educates Consumers About Health Options which Lead to Lowered Medical Costs
Historically, health insurers like UNH have operated in much the same way; customers pay a premium then go see a doctor when they get sick. This approach suffers from a two-fold problem: customers may use the hospital more often than they would if they had to pay for each service, and when they use it, they often don't understand the treatment they receive. Consumerism aims to address both these problems by educating consumers about their health and health options in the hopes of discouraging the excessive use of medical services. Additionally, it also aims to make consumers more responsible for the costs they incur. UNH has responded to the consumerism movement by putting its data analysis to work; it has developed provider-quality measurements to analyze the effectiveness of its in-network health providers. This metric helps UNH identify high-cost, low-impact providers, therefore enabling the company to improve service and lower expenses by directing consumers away from such providers. These measures are also designed to inspire trust in UNH among its enrollees, in the hopes that building a relationship will help maintain membership.
Generic Drugs Pressure on Pharmaceuticals is Helpful for UNH's Proftability
Prescription drugs expenses are one of the largest outlays that United Health makes on its clients' behalf, and prescription drug costs have been rising rapidly. Between 1995 and 2005, prescription drug costs increased by an average of 12%, while other medical costs increased by just 5-6%. UNH saves money when its clients purchase generic drugs instead of brand name drugs. The differences between generic and brand name drugs can be staggering: Costco Wholesale (COST) sells Prozac and Zocor for over $140, while their generic equivalents cost only $5 each.
In terms of a larger debate about the availability of quality health care in the U.S., there has been growing pressure on pharmaceutical companies to lower prescription drug prices by either cutting prices or granting generic licenses. This issue is often brought up in political discourse, with many politicians pushing for prescription drug reforms. United stands to benefit from these activists' success in achieving their goal of lower drug prices; whether through pharmaceutical companies' cost cutting or an increase in the availability of generics, United would see its outlays for patients' medications decrease, boosting profits.
Competitive Comparison
Of the various individuals UNH services, about a third are sponsored by the government through Medicare (~5.6 million) or Medicaid (~1.4 million). The remaining two thirds are divided into risk-based and fee-based customers. Fee-based customers are usually businesses that pay a certain rate to insure all their employees, whereas risk-based customers are individuals who pay for their insurance. Fee-based customers generally pay a flat rate for coverage, whereas risk-based customers pay premiums determined by their "riskiness", or the likelihood that they'll need extensive medical services later on.
These numbers make UnitedHealth Group the second largest insurer in the United States, and the company's size translates into a scale advantage over many competitors.[26] Because UNH has such a large customer base, it has considerable bargaining power when negotiating with hospitals and physicians (that it might want to employ). Its size may also be attractive for hospitals looking to join United's network, since United can pretty much guarantee them a steady stream of business. United has sought to maintain its scale advantage throughout the country by acquiring smaller health insurers like PacifiCare on the West Coast and Oxford in New England.
The table below shows United’s enrollment relative to that of its largest competitors across all of its books of business; their relative rank within the different markets they serve (e.g., private, Medicare, Medicaid) may differ.
Top 10 U.S. Health Plans by Total Enrollment[27]
2009 Rank Company 2007 Enrollment 2009 Enrollment
1 WellPoint Health Networks (WLP) 30,242,907 33,952,110
2 UnitedHealth Group (UNH) 17,080,995 31,980,000
3 Aetna (AET) 13,861,191 18,557,996
4 Health Care Service Corporation 12,109,624 12,400,000
5 CIGNA Corporation (CI) 9,081,140 11,131,599
6 Kaiser Permanente 8,846,616 8,722,019
7 Humana (HUM) 11,358,428 8,359,031
8 Health Net, Inc. N/A 6,659,000
9 Blue Cross Blue Shield of Michigan 4,570,981 4,548,575
10 Highmark, Inc. N/A 4,114,476
The following table compares United to three other leading health insurers across various measures of performance and profitability. The implied operating margin is equal to what the operating margin would be if investment income, premiums, and fees were the only source of revenue, and medical losses, benefits, and administration costs were the only expenses. In reality other factors also influence profitability, especially legal fees. Recently, however, these fees have not been significant for United.
Health Insurers, $MM Premiums and fees Combined Ratio MLR ACR Implied Operating Margin
UnitedHealth Group 67,582 96.28% 79.87% 16.41% 4.31%
Aetna 25,500.0 93% 72% 21% 7.1%
Humana 24,434.00 97.15% 82.95% 14.20% 5.37%
Cigna 10,666 94.38% 67.38% 27.00% 7.18%
Note that for Cigna and UnitedHealth Group, the data refer only to medical insurance, not other products.
UnitedHealth has traded scale for profitability. Relative to its peers, its 5.25% implied operating margin is unimpressive. United's lower profit margins are the result of its higher medical loss ratio, as its cost ratio compares favorably against those of its peers.
United is most impressive in its market penetration. It is difficult to compare market shares for health insurers since not all of them are active in every state, a result of variations in legislation from state to state. For example, even though United is based in Minnesota, it does not insure anyone there, since only nonprofits are allowed to do so. One way to make comparisons, however, is to calculate market share for a company in the 15 states in which it does the most business. This approach leads to a market share of 16.2% for United Health, second only to Wellpoint, another national insurer, which scores a whopping 32.9%.
UnitedHealth Group (NYSE: UNH) is the parent company of various other health services organizations and health insurers. With $87.1 billion in revenue in 2009, UNH is the second-largest publicly traded health insurance company in the United States.[1] As such, it has significant scale advantages that extend across its major product lines, allowing it to attract new member hospitals as well as negotiate for lower prices.
The company generates 90% of its revenues through three health insurance organizations: one for private clients, one for Medicare recipients, and one for Medicaid beneficiaries.[2] The government-sponsored clients represent an important source of business for UNH, so the current national health care debate could heavily impact United's operations. United has a number of other products and services, the most significant of which is its Ingenix, a data gathering and analysis division. United uses the data to evaluate the effectiveness of its doctors and hospitals; the company also sells the information to other health industry professionals. In 2008, UNH acquired three companies--Unison Health Plans, Sierra Health Services, and Fiserv Health-- for $4.2 billion.
Company Overview
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 FY2010 Q2 Earnings Summary
1.3 FY2010 Q3 Earnings Summary
1.4 FY2010 Q4 Earnings Summary
2 Key Trends and Forces
2.1 Healthcare Reform will have a Material Effect on UNH's Operations
2.2 Rising Healthcare Costs and Unemployment Put Pressures on Earnings
2.3 Consumerism Educates Consumers About Health Options which Lead to Lowered Medical Costs
2.4 Generic Drugs Pressure on Pharmaceuticals is Helpful for UNH's Proftability
3 Competitive Comparison
4 References
United Health Group consists of many separate divisions, which offer a wide range of products and services geared toward the health care industry. Health insurance service is by far the most important part of United's operations. These insurance divisions essentially sell protection from risk: as insurers, they agree to pay for a percentage of their customers' medical expenses in exchange for a fee, called the premium. The basic business plan is to offer clients a premium based on the the expected cost of caring for them, plus a markup for administrative costs and profit. Approximately 90% of UNH’s revenues are derived from health insurance services.[2] United has three subsidiaries that provide health insurance: United Health Care, Ovations, and Americhoice. United Health Care sells to individuals and companies, Ovations provides Medicare benefits, and AmeriChoice handles Medicaid clients.
In addition, United has a number of other products and services, the most significant of which is its Ingenix," the research wing of the company that gathers and analyzes company data, as well as data about the health care industry as a whole. The company uses the data for its own purposes and also sells the information to other players in the health care industry. Ingenix's main customers are medical device manufacturers, health insurance providers, and health care professionals. The data management techniques are an important part of UNH's consumerism campaign to provide more efficient service and to foster stronger relationships with its clients. Moreover, as the industry leader by enrollment, UNH has only limited opportunities to expand its business by taking on more members. Instead, it can grow by developing new lines of products and services.
Business and Financial Metrics
In Q1 2010, United’s net income jumped 21% over Q1 2009 to $1.19 billion. While revenues increased by 5.4% to $23.2 billion, net margins increased from 4.5% to 5.1%. This was thanks to a medical loss ratio (percent of premium revenue spent on medical costs) of 81.3% in the quarter, down from 82.4% the previous year. The company cited a mild flu season and strong expense management. [3] However, the strong performance has analysts worried that UNH will draw unwanted political attention.[4]
For the year ended on December 31, 2009, United’s revenues totaled $87.1 billion, up 7.3% compared to the previous year, while fourth quarter revenues of $21.8 billion also advanced 7 percent year-over-year. Yet operating income was basically the same, at $6.36 billion in 2009, as its operating margin fell from 7.8% in 2008 to 7.3% in 2009. [5]
In the following table, AmeriChoice, Ovations, and Commercial Markets revenue have all been consolidated as Premiums:
UNH's Revenue for FY 2006-2009 (Dollars in millions)
[6] 2006 2007 2008 2009
Premiums $65,666 $68,781 $73,608 $79,315
Services 4,268 4,608 5,152 5,306
Products 737 898 1,655 1,925
Investment and Other Income 871 1,144 771 592
Total Revenue 71,542 75,431 81,186 87,138
FY2010 Q2 Earnings Summary
United Health posted a net income of $1.12 billion, or $0.99 EPS for the second reporting quarter of FY2010, an increase of 30.4% compared to same period FY2009. Revenues for the second quarter came to $23.3 billion, a 7% rise compared to second quarter FY2009.[7] Out of total revenues, Health-benefits rose 7%, which was attributed to the growth of 1.1 million people in the public and senior markets, which therefore partially offset the 0.4 million decrease in people insured by the commercial-benefits market due to the increase in U.S. unemployment.[8] However, these gains, as seen by almost all major health insurers may be derived by the fact that claims from previous quarters came in much lower than expected. This is specifically because flu season was much milder than anticipated, and that the swine flu scare was less intense than anticipated.[9]
Net profit margin for United Health increased to 4.8% from 4% year earlier, which was helped further by cost management on top of the increase in revenues, but the increase in net profits also created bearish pressure for investors who worried that "the fatter insurance profits, the bigger a target they'll be for regulators."[10] Overall, the company's total enrollment grew by 1% to 32.5 million, especially in the Medicare and Medicaid business.
FY2010 Q3 Earnings Summary
UNH reported third quarter results of net income of $1.27 billion ($1.14 EPS) in the third reporting quarter of FY2010, a 23% increase compared to $1.04 billion in third quarter FY2009.[11] The $1.14 EPS beat anlyast expectations of $0.84 earnings per share. Revenues were also up 9% to $23.67 billion compared to same quarter last year.[12]
However, UNH's outlook for FY2011 is gloomier; specifically, continued unemployment, tighter city and state budgets, and tighter state funding for the Medicaid program would all reduce operating revenue and bottom line for FY2011.[13] Specifically, as health insurers such as UNH will be required to meet minimum medical loss ratios (MLRs) or provide refunds to consumers. MLRs are measured by the percentage of customers' premiums against that of the medical claims spent by insurers.[14]
FY2010 Q4 Earnings Summary
UNH posted earnings of $1.04 billion or $0.94 EPS in the fourth reporting quarter of FY2010, a 10% increase compared to $944 million or $0.81 EPS in the same quarter last fiscal year.[15] Quarterly revenue for UNH reached $24.03 billion compared to $21.78 billion same quarter last year. This figure beat analyst predictions of $0.84 EPS, as UNH's medical-loss ratio totaled 79.6% for the fourth quarter, an improvement of 1.7%. Beyond this, UNH's net margins also improved by 50 basis points to 4.9%.[16]
By maintaining strong enrollment growth, UNH was able to counter pressuring hospital operators given the soft U.S. economy and employment picture.[17] In terms of business segments, commercial enrollment was up to 24.8 million from 24.7 million one year ago primarily because of greater enrollment in commercial risk-based insurance.[18]
Key Trends and Forces
Healthcare Reform will have a Material Effect on UNH's Operations
On March 30, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, the much awaited and much debated health reform law. Several of its provisions will affect UnitedHealth and other insurers. The overall effect, however, remains to be seen.
The law includes a large number of health-related provisions to take effect over the next four years, including expanding Medicaid eligibility, subsidizing insurance premiums, providing incentives for businesses to provide health care benefits, prohibiting denial of coverage/claims based on pre-existing conditions, establishing health insurance exchanges, and support for medical research. The costs of these provisions are offset by a variety of taxes, fees, and cost-saving measures, such as new Medicare taxes for high-income brackets, taxes on indoor tanning, cuts to the Medicare Advantage program in favor of traditional Medicare, and fees on medical devices and pharmaceutical companies; there is also a tax penalty for citizens who do not obtain health insurance (unless they are exempt due to low income or other reasons).[19]
The expansion of Medicaid together with the health insurance mandate and premium subsidies are projected expand insurance to 32 million Americans without coverage. United stands to benefit from this, as the one of the largest insurers as well as the largest government contractor for administering Medicaid (UNH’s AmeriChoice program brings in $6 billion annually).[20]
The law ends will end the practices of refusing to cover patients with pre-existing conditions. This will likely lead to an increase in premium costs; however, given that the rule applies across the board, it may not hurt insurers’ competitive positioning.
Cuts to Medicare Advantage program reimbursements may hurt UNH, with its 2.0 million MA enrollees as of March 2010 [21], in the short term. In the long term, UNH may lose out still more: as MA beneficiary premiums increase to reflect lower government reimbursements, Medicare patients may migrate to less profitable Prescription Drug Plans and opt to receive their medical benefits from the traditional government-run Medicare program.
The health care law will also effectively begin to cap insurance company profits in 2011. Insurers will be required to spend 85% of large-group and 80% of small-group plan premiums on medical costs, or else improve health-care quality or return the difference to customers in the form of a rebate. In Q1 2010, United’s net income jumped 21% over Q1 2009 thanks to a medical loss ratio (percent of premium revenue spent on medical costs) of 81.3% in the quarter, down from 82.4% the previous year. [22] Under the new law, such a performance will not be possible again in 2011. Moreover, the strong performance has analysts worried that UNH will draw unwanted political attention amid continuing negative political sentiment directed at insurers.[23] However, insurer Wellpoint reportedly reclassified certain administrative expenses--$500 million dollars worth--in a way that increased its medical loss ratio. In January, WellPoint began costs such as as nurse hotlines, "medical management," and "clinical health policy," under medical benefits. [24] Thus, the impact remains to be seen.
Rising Healthcare Costs and Unemployment Put Pressures on Earnings
Rising healthcare cost is a major concern for health insurance companies, and trends show healthcare costs for U.S. businesses rising 9% in 2010. These rising medical costs combine with the recession and increased unemployment to create a "tug-of-war" between the need to raise premiums and the downtrend on enrollment and willingness of consumers and business to pay high premiums.[25] These competing pressures are having the overall effect of lowering UnitedHealth Group's revenues and margins. UnitedHealth Group's ability to mitigate the negative effects of rising healthcare and unemployment will be critical to it's ability to maintain strong earnings and compete in the health insurance industry.
Consumerism Educates Consumers About Health Options which Lead to Lowered Medical Costs
Historically, health insurers like UNH have operated in much the same way; customers pay a premium then go see a doctor when they get sick. This approach suffers from a two-fold problem: customers may use the hospital more often than they would if they had to pay for each service, and when they use it, they often don't understand the treatment they receive. Consumerism aims to address both these problems by educating consumers about their health and health options in the hopes of discouraging the excessive use of medical services. Additionally, it also aims to make consumers more responsible for the costs they incur. UNH has responded to the consumerism movement by putting its data analysis to work; it has developed provider-quality measurements to analyze the effectiveness of its in-network health providers. This metric helps UNH identify high-cost, low-impact providers, therefore enabling the company to improve service and lower expenses by directing consumers away from such providers. These measures are also designed to inspire trust in UNH among its enrollees, in the hopes that building a relationship will help maintain membership.
Generic Drugs Pressure on Pharmaceuticals is Helpful for UNH's Proftability
Prescription drugs expenses are one of the largest outlays that United Health makes on its clients' behalf, and prescription drug costs have been rising rapidly. Between 1995 and 2005, prescription drug costs increased by an average of 12%, while other medical costs increased by just 5-6%. UNH saves money when its clients purchase generic drugs instead of brand name drugs. The differences between generic and brand name drugs can be staggering: Costco Wholesale (COST) sells Prozac and Zocor for over $140, while their generic equivalents cost only $5 each.
In terms of a larger debate about the availability of quality health care in the U.S., there has been growing pressure on pharmaceutical companies to lower prescription drug prices by either cutting prices or granting generic licenses. This issue is often brought up in political discourse, with many politicians pushing for prescription drug reforms. United stands to benefit from these activists' success in achieving their goal of lower drug prices; whether through pharmaceutical companies' cost cutting or an increase in the availability of generics, United would see its outlays for patients' medications decrease, boosting profits.
Competitive Comparison
Of the various individuals UNH services, about a third are sponsored by the government through Medicare (~5.6 million) or Medicaid (~1.4 million). The remaining two thirds are divided into risk-based and fee-based customers. Fee-based customers are usually businesses that pay a certain rate to insure all their employees, whereas risk-based customers are individuals who pay for their insurance. Fee-based customers generally pay a flat rate for coverage, whereas risk-based customers pay premiums determined by their "riskiness", or the likelihood that they'll need extensive medical services later on.
These numbers make UnitedHealth Group the second largest insurer in the United States, and the company's size translates into a scale advantage over many competitors.[26] Because UNH has such a large customer base, it has considerable bargaining power when negotiating with hospitals and physicians (that it might want to employ). Its size may also be attractive for hospitals looking to join United's network, since United can pretty much guarantee them a steady stream of business. United has sought to maintain its scale advantage throughout the country by acquiring smaller health insurers like PacifiCare on the West Coast and Oxford in New England.
The table below shows United’s enrollment relative to that of its largest competitors across all of its books of business; their relative rank within the different markets they serve (e.g., private, Medicare, Medicaid) may differ.
Top 10 U.S. Health Plans by Total Enrollment[27]
2009 Rank Company 2007 Enrollment 2009 Enrollment
1 WellPoint Health Networks (WLP) 30,242,907 33,952,110
2 UnitedHealth Group (UNH) 17,080,995 31,980,000
3 Aetna (AET) 13,861,191 18,557,996
4 Health Care Service Corporation 12,109,624 12,400,000
5 CIGNA Corporation (CI) 9,081,140 11,131,599
6 Kaiser Permanente 8,846,616 8,722,019
7 Humana (HUM) 11,358,428 8,359,031
8 Health Net, Inc. N/A 6,659,000
9 Blue Cross Blue Shield of Michigan 4,570,981 4,548,575
10 Highmark, Inc. N/A 4,114,476
The following table compares United to three other leading health insurers across various measures of performance and profitability. The implied operating margin is equal to what the operating margin would be if investment income, premiums, and fees were the only source of revenue, and medical losses, benefits, and administration costs were the only expenses. In reality other factors also influence profitability, especially legal fees. Recently, however, these fees have not been significant for United.
Health Insurers, $MM Premiums and fees Combined Ratio MLR ACR Implied Operating Margin
UnitedHealth Group 67,582 96.28% 79.87% 16.41% 4.31%
Aetna 25,500.0 93% 72% 21% 7.1%
Humana 24,434.00 97.15% 82.95% 14.20% 5.37%
Cigna 10,666 94.38% 67.38% 27.00% 7.18%
Note that for Cigna and UnitedHealth Group, the data refer only to medical insurance, not other products.
UnitedHealth has traded scale for profitability. Relative to its peers, its 5.25% implied operating margin is unimpressive. United's lower profit margins are the result of its higher medical loss ratio, as its cost ratio compares favorably against those of its peers.
United is most impressive in its market penetration. It is difficult to compare market shares for health insurers since not all of them are active in every state, a result of variations in legislation from state to state. For example, even though United is based in Minnesota, it does not insure anyone there, since only nonprofits are allowed to do so. One way to make comparisons, however, is to calculate market share for a company in the 15 states in which it does the most business. This approach leads to a market share of 16.2% for United Health, second only to Wellpoint, another national insurer, which scores a whopping 32.9%.
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