UnitedHealth Looks Like Dead Money

UnitedHealth Group (UNH) reported disappointing earnings and offered equally disappointing guidance on earnings yesterday, putting the stock on the skids. The sharp drop in UNH's stock price after the earnings announcement gave a major institutional holder, Tom Marsico with Marsico Capital, to use UNH's conference call to recommend that the company sell off some of its valuable non-insurance businesses. He got a respectful "we're always evaluating our options" reply. Read the conference call for more details.

The UNH story is simple. UnitedHealth and health care providers are running into tremendous price resistance. HMOs don't really control health care prices or utilization, they just pass increases in costs on while trying to maintain their operating margins. Many insurers are trying to control costs, for example, by pricing Tier 4 drugs so that nobody can afford them and so that drug companies will cut their prices, but in the process they anger even the strongest free-market advocates.

The reason such efforts seldom work is that consumer backlashes such as the one that almost totally defanged HMOs as cost containment agencies in the 1990s put them into full retreat sooner or later. Thus, some polls show more consumers than not favor a single-payer health care system, which would put UNH and its peers out of business for all practical purposes. The political environment is even more anti-insurer than it was in the 1990s and 1980s.

As a result, the political environment for insurers is at an all time high, and the insurers seem to be giving their enemies excuses to make their businesses much less profitable over the long-term. In its news release, UNH promises to fix its operational problems, which means it will try even harder to ration care, deny claims, raise co-pays and in general infuriate its enrollees, employers and even politicians who historically have supported the company and its industry.

All of this is coming while Senators Clinton and Obama are promising to solve the "health care crisis" and Senator Clinton is promising to take insurers' profits and invest them in government programs. If McCain wins, he'll probably have a Congress controlled by the Democrats and won't spend much time on health care. But states' legislators are angry and can do a lot of damage to the health insurers. They've been nibbling at the edges and seem at the tipping point of boiling over.

No wonder, then, that UNH's stock has met its bearish objective on point and figure charts and looks weak on weekly and monthly charts. UNH looks like it will be dead money for a long time. UnitedHealth CEO, Stephen Hemsley, opened his conference call with analysts with a frank assessment of the company's outlook:

We have lowered our earning outlook for the rest of the year, reflecting what we feel will be near term pressures on revenue growth and related earnings and margin. We have been careful and measured in doing so. These projected reductions are caused by a number of concurrent events: top-line revenue short falls reflecting competitive pressures, impacting both enrollment volumes and net premium yield, a uniquely important shift in a difficult economic environment toward lower benefits and lower price points, as well as the continuing shift to self-insurance.

In the Medicare market we are seeing lower than expected engagement by seniors in traditional HMO style product offerings and interest rates have dropped dramatically, which will affect our projected investment income for the balance of the year. And so the 10% full year downward revision reflects declining risk-based member and revenue growth over the balance of 2008. Senior business mix and commercial premium pricing pressure, an unusually severe flu season, and reduced investment income, and we are addressing operating cost levels that need to be realigned to our revised growth outlook.

At this stage we do not see changes in forecasted medical cost trends at the national level. We are clearly being impacted by the declining national economic outlook, including employment levels, the interest rate environment and inflation trends, which are combing to create pressures not seen for many years.

Our specific sector conditions are in flux as well, some positive and some not. New generations of products and services are moving forward, such as in the consumer domain, where we have dramatic national leadership. Emerging markets are beginning to open up, such as in state programs and in culture ethic offerings.

We are also regaining traction in the large employer market; at the same time other products are beginning to mature, such as Medicare Part D. In addition we see increasing levels of employed consumers’ simply declining coverage of any type, particularly in smaller businesses. And the pricing economics across all markets continues to be intense, even given the relatively stable medical cost environment.

Today, though it is not clear how quickly the positive trends will produce results against this challenging backdrop, our [second quarter] and outlook for 2008 has been revised in light of the challenges we face, principally around growth in risk based offerings.

Hemsley said that in the first quarter, the worst flu season in five years cost the company $80 million more than budgeted for flu claims, or 4 cents a share.

Disclosure: I don't own this stock or any other health insurers.

Comments

[risktaker53]

When the government completely takes over healthcare and the big and small insurance companies go out of business, has anyone thought of the impact to the national unemployment figures? Hundreds of thousands of people, probably more like millions of people, will lose their jobs. Also, the failure of these major financial institutions will have a negative impact on the stock markets around the world when the huge amounts of investment capital that they provide immediately dry up. Forget recession...we will be headed towards a major world-wide depression...all for the sake of having our wonderfully competent and fiscally responsible Federal government take over the very difficult job of dealing with the greedy medical profession. Good luck. You might get more than you bargained for...