) reported an 8% year-on-year increase in revenues for the fourth
quarter of 2013 with a 14% EPS growth, beating market expectations.
However, the stock slid 3% as the health insurance company's
operating margin for the full year dropped from 7.6% in 2012 to
6.4%. Government funding cuts to the Medicare Advantage program and
the implementation of the Patient Protection and Affordable Care
Act (PPACA) have been exerting downward pressure on UnitedHealth's
margins; the 2013 medical care ratio (medical costs to premiums)
increased 110 basis points to 81.5%.
The company has been looking to offset this downward pressure
through revenue growth and international expansion, particularly in
Brazil. UnitedHealth is the biggest health insurer in the U.S.,
with a market share of 14%. This market position will be crucial in
the coming months as the Obamacare act gets into full swing.
Through 2013, the company reported 900,000 enrollments in the U.S.
and 400,000 enrollments in its international operations. Our
$74 price estimate
for UnitedHealth's stock is in line with the current market
See Full Analysis For UnitedHealth Group Here
Will UnitedHealth Be Able To Retain Its
The website www.healthcare.gov was launched during the December
quarter, offering individual health insurance plans in 36 states in
the U.S. The remaining states also launched their own websites.
Although there were some technical issues leading to a slow initial
response, the exchanges picked up momentum in December with 2.2
million people enrolling in insurance plans through December
Around 7 million Americans are expected to enroll in health
insurance plans and 8 million additional people are expected to
enroll in Medicaid plans by March 2014. According to the last U.S.
census, around 17% of the U.S. population is uninsured, indicating
that more enrollments can be expected in the coming months.
UnitedHealth is currently in a strong position to capitalize, with
a market share of 14% in the private heath insurance market and 20%
in the Medicare market.
On the downside, the myriad choices offered by the health
insurance exchanges might lead to a loss of share for UnitedHealth.
According to a report by the Department of Health & Human
Services, consumers from various states will, on average, be able
to choose from 53 health plans through the exchanges. More than 95%
of customers will have a choice between at least two health
insurers, with more than 1,300 health insurance companies in the
market. As a result of the competition, we expect a slight decline
in market share for UnitedHealth over the coming months.
The Big Downside
Medical costs account for more than 80% of UnitedHealth's
operating expenses (excluding Depreciation and Amortization) and
the company has maintained a medical care ratio of 80% for the last
few years. However, the PPACA mandates a minimum medical care ratio
(medical costs divided by premiums) of 80% for individual and small
group plans, and 85% for large group plans. To make matters worse,
the government has decided to cut Medicare payments to insurance
companies by nearly 30% in the next 10 years. Although the company
has undertaken several cost cutting measures to reduce operating
costs, we expect the margins to drop from 9% to 7% in the coming
A big concern for health insurance companies is the demographic
opting for enrollment through the PPACA. Obamacare is designed to
distribute costs evenly through the U.S. population; the act
requires policies to be issued regardless of community rating or
medical condition, with insurers offering the same premium to all
insured parties of the same age and location, regardless of gender
or pre-existing condition. The act also offers subsidies to low
income individuals and families with income below the federal
poverty level. This means that the cost of health insurance will
increase for young and healthy citizens who might be disinclined to
opt for the plans.
So far, this trend appears to be true; 33% of the citizens who
enrolled in the plans were in the 55-60 age bracket. This age group
is more likely to incur medical costs; 44% of the people in the
45-64 age group visit medical providers 3 or more times in a year,
with over 50% regularly using prescription medicine. For the lower
age groups, the percentage of people visiting medical providers 3
or more times in a year is just around 25% with 30% of the
population not utilizing medical services at all.
Industry experts have termed this trend an "adverse selection
death spiral". In the worst case, if enrollment in the 18-34 age
bracket falls to 25%, health insurance companies can even run
on losses, with costs exceeding premium income. We will keep an eye
on this sector in the coming months and update our model as the
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