By Brett Chase
The news this week that a federal judge ruled a key portion of the Obama Administration’s healthcare reform legislation to be unconstitutional – the part requiring people to have insurance — might seem to rescue UnitedHealth Group (UNH), the big insurer, which has groused about the high costs of complying with the new law.
But the truth is UnitedHealth doesn’t need rescuing, and there is probably as much benefit to the company in healthcare reform as there is harm. U.S. District Court Judge Henry Hudson of Virginia’s ruling may stand or may be thrown out on appeal, but what seems certain is that UnitedHealth and other insurers will profitably adapt. And the recent doubt that has dogged UnitedHealth’s stock presents a buying opportunity to long-term investors.
Yes, the company is predicting as much as an 11% decline in earnings per share next year in part because of reform-related changes. But, longer term, investors should consider the company’s diverse mix of businesses. (The company forecasts double-digit EPS growth beginning in 2012.) As for next year: New rules tell insurers to spend a minimum amount on medical expenses (85 cents of every premium dollar from large-employer plans and 80 cents for small business and individuals). The change aims to force insurers to spend more money on things that benefit insured folks rather than on administrative costs, marketing and salaries. Understandably, concerns over health reform’s effects on insurers damped enthusiasm for the stock even as the company was posting profit gains this year. The stock recovered a bit but the shares are still undervalued, according to YCharts Pro.
UnitedHealth threw wary investors a bone earlier this year, substantially increasing the company’s dividend to 50 cents a year (in quarterly payouts) from 3 cents. As a result, UnitedHealth has the only respectable dividend yield among the biggest insurers.
As for reform, UnitedHealth knows how to deal with adversity. Four years ago, the company’s long-time CEO resigned after a stock options fraud scandal. A terrible economy means fewer people are insured because of lost jobs. And UnitedHealth and rivals were made villains by Obama as the cause for high healthcare costs. Those challenges are in addition to the up-and-down cycles of the insurance industry. And yet, through nine months this year, earnings per share are up 30%.
One thing UnitedHealth does well is covers its bets. While employer health plans are big business for the insurer ($10.4 billion in third-quarter revenue), UnitedHealth also sells a lot of supplemental Medicare coverage to seniors ($8.8 billion in quarterly sales). The so-called Medicare Advantage plans were targeted by the president and congressional Democrats, and, going forward, UnitedHealth is going to be limited on the rates it charges seniors for such policies. But UnitedHealth also stands to benefit from millions of Baby Boomers joining the ranks of the Medicare-insured over the next decade. UnitedHealth is even in the Medicaid business; a division that administers Medicaid and Children’s Health Insurance Program for states rose almost 30% in the third quarter to $2.7 billion.
Indeed, despite headwinds, UnitedHealth was able to increase revenue steadily in recent years.
While premiums sold for employer, government and individual insurance plans account for more than 90% of revenue, UnitedHealth has a number of smaller businesses that can benefit from the new health reform law, including disease management and wellness programs as well as consulting, health data and software businesses for doctors, hospitals and employers.
The idea that slow-footed legislators might corral crafty insurers – a notion UnitedHealth and others helped spread with all their complaining – actually seems a little silly.
Disclosure: No position