UnitedHealth Group: An Unsustainable Model

Apr.23.08 | About: UnitedHealth Group (UNH)

UnitedHealth Group (NYSE:UNH) reported a 7% profit increase in the first quarter, but issued disappointing guidance. For the full year 2008: membership is expected to decrease by 700K, the medical loss ratio is expected to increase from 80.6% to 81.3%, and the earnings outlook dropped 10%. United has become a no-growth company and the term “cost containment” no longer applies.

United’s fee based business is the only bright spot, be it the least profitable. United is willing to incur membership losses to maintain earnings in its more profitable risk based business. To quote Doug Parker, US Airways’ (LCC) CEO: “We only want profitable growth.” But customers are starting to push back. Small groups and individuals are either dropping health insurance completely or selecting lower cost plans from other insurers. United should have the leverage to force medical providers to lower costs in response to consumer demands, but has made no effort to do so. Instead they have chosen to be purely a cost plus player.

I do not believe that United’s business model is sustainable. The higher profit risk based business will continue to fall. Its market will slowly disappear. The fee based business margins will continue to shrink if they are no longer truly providing cost containment. Administrative services can be provided by anyone. I know this is an over simplification, but the trend is clear.

United has conceded that even seniors are beginning push back on the pricing of Medicare HMOs. They are leaving United for lower or no cost plans. United said in today’s conference call they are continuing to make progress in the Medicaid portion of government business.

The government business is less profitable than commercial. Again, United said they would not sacrifice profits to gain government business.Analysts questioned whether healthier customers were dropping insurance, leaving United with a higher risk pool. United does not think their risk profile has changed. However, they did admit that first year Medicare customers use a much high percentage of services. They attribute it to “deferred medical care.”Politically the health insurance industry is at a cross road. The clientele for the current model is falling.

Despite the “free market” mantra, insurers are becoming more dependent on the government for their profits. The industry may actually need an all inclusive business model to survive.

Admittedly, I am biased toward Hillary Clinton’s healthcare plan. But, with or without her, the trend toward reducing costs through a more inclusive risk pool is gaining momentum.

No disclosures.