UnitedHealth Group (UNH) held its 2012 investor conference in late November, where management discussed the trends being witnessed across the company’s businesses. Most significant was an expectation of a continued decline in fully insured commercial customers in 2013, as more businesses are seen covering healthcare costs themselves while they hire the insurer to manage healthcare benefits.
We have slightly reduced our price estimate of UnitedHealth Group to $69, which is still about 25% ahead of the current market price, to reflect these developments.
PPACA On Right Track With Obama’s Re-Election
The re-election of Barack Obama should ensure that the Patient Protection and Affordable Care Act (“PPACA”) remains in place. The purpose of the PPACA is to reduce healthcare costs and expand healthcare coverage among Americans. Most of the changes will be implemented within the next 2-3 years. The bill includes an individual mandate, which penalizes individuals who can afford health insurance but choose not to purchase it. It also expands the availability of Medicaid and restricts the ability of insurers to refuse service to customers with pre-existing conditions.
As a result, the government estimates that an additional 30 million Americans will have health insurance (either private, Medicare or Medicaid) over the next five years. UnitedHealth, by virtue of being the largest health insurance provider with over 45 million enrollments nationwide, stands to benefit significantly. The act will allow the company to meaningfully increase its enrollments over the next four years.
Eventual Economic Recovery, Addition Of TRICARE To Bolster Growth
In the near term, UnitedHealth could witness a decline in its private health insurance business due to persistently high unemployment and weak macroeconomic conditions. High unemployment levels have had an adverse impact on the number of employer-sponsored health insurance enrollments, while Medicaid enrollments have increased steadily. Additionally, many employers have cut healthcare benefits in response to market conditions. However, as economic conditions gradually improve, we expect employer-sponsored health coverage to increase along with the quality of those plans (which will in turn bring higher premiums).
In addition, UnitedHealth won a five-year TRICARE contract to manage active-duty and retired military personnel in western U.S. and their families. The contract, starting from April 1, 2013, will add 2.9 million beneficiaries.
Margin Risks Are Already Incorporated
The PPACA will also introduce health insurance exchanges in order to encourage competition in the market, and will regulate premiums and medical care ratios (medical costs/premiums) of health insurers. This will likely have a negative effect on large insurers such as UnitedHealth Group, as it will result in pressure on pricing and mandatory caps on margins. Therefore, we expect margins to decline going forward. However, we believe that the benefits for UnitedHealth from the increase in enrollments will outweigh the pressures on pricing and margins.
International Expansion Presents Opportunities
UnitedHealth is focusing on international expansion to maintain its growth momentum, and it recently agreed to acquire Amil Participacoes SA, Brazil’s largest health insurer with over 5 million customers, for $4.9 billion. The deal, which is expected to close in 2013, will allow the company to expand its footprint outside of the U.S. and capitalize on the growth potential in Latin America. We will update our analysis to include the acquisition when more information is available.
Disclosure: No positions.