UnitedHealth's Innovations, Acquisitions Drove Stock

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When UnitedHealth Group went public in 1984, the nation was closer in time to the inception of Medicare than it was to ObamaCare and federal mandates made it difficult for HMOs to churn powerful earnings growth.

Yet the Minnetonka, Minn.-based insurer became a colossus bestriding the American health care system, largely through acquisitions and innovation, buying other health plans, keeping a view toward double-digit growth as well as streamlining and unifying procedures for its companies throughout.

From its November 1987 low to its March 2014 high,UnitedHealth ( UNH ) shares soared 101,510%.

UnitedHealth traces its origins to the 1970s. Richard Burke spent several years at InterStudy, a Minnesota health care think tank that was critical to developing -- and winning congressional approval for -- the health-maintenance organization.

Burke, who remains UnitedHealth's chairman today, decided to strike out on his own with a for-profit venture.

Early Technology Adopter

Now the largest U.S. health insurer, UnitedHealth turned its origins in technology into an advantage. The company launched computerized health claims systems, first in the Minneapolis-St. Paul area and later in other markets throughout the nation.

Upon its launch in the 1980s, the computerized claims processing system reduced administrative costs to $1.09 per claim -- much lower than the $3 or $4 that was the industry standard at the time. The interactive system also allowed doctor offices to discuss claims and resolve problems immediately after claims were filed.

"We were early in capturing that data," said John Penshorn, senior vice president at UnitedHealth. "We used it to improve performance."

In 1992, the insurer launched another innovation later adopted throughout its industry: "report cards" that rated medical providers on cost, quality and other performance variables to help patients make informed decisions.

UnitedHealth also was the first company to create and implement a pharmacy benefits business that took care of prescription drug claims at retail pharmacies. Using its purchasing power for members' benefit, UnitedHealth negotiated better prices with pharmacies and drugmakers.

Getting Bigger -- And Leaner

A pivotal moment came in 1988 when Dr. William McGuire joined UnitedHealth as executive vice president after UnitedHealth bought Peak Health Plan, which he helmed at the time.

When McGuire joined UnitedHealth's board, it was a regional HMO that wasn't profitable. Annual revenue was $400 million. When he resigned from UnitedHealth in 2006 -- amid a stock options backdating scandal -- revenue topped $70 billion.

Today, the company serves more than 85 million people on its rolls worldwide and is expanding into 125 countries.

"McGuire began the long process of standardizing procedures and benefit structures and operations," said Sheryl Skolnick, an analyst at CRT Capital Group, a Stamford, Conn.-based financial services firm.

At the same time UnitedHealth was keeping its administrative costs down and efficiency up, McGuire set out to make the company larger, building economies of scale by buying various regional HMOs over the years.

PrimeCare of Milwaukee, PacifiCare in California, Oxford Health Plans in the New York area and Medicaid insurance company AmeriChoice are some of the acquisitions that transformed UnitedHealth into a national player.

A strong emphasis on double-digit growth and returning value to shareholders led UnitedHealth's shares to grow 8,342% from the 1987 low to their 1994 peak.

HMO Backlash

The mid-1990s were a difficult time for the health care industry. President Clinton's reform plan -- dubbed "HillaryCare" -- led to uncertainty about the regulatory climate. Rising health care costs and consumer backlash to its cost rationing -- in the form of lawsuits -- also weighed on UnitedHealth.

In 1994, UnitedHealth sold Diversified Pharmaceutical Services, its pharmacy benefits management unit, to SmithKline Beecham for $2.3 billion. In 1995 it bought MetraHealth Cos. for $1.65 billion.

Three years later, the company brought in Stephen Hemsley, a former managing partner and CFO at then-accounting giant Arthur Andersen, to help manage what had become a massive enterprise.

21st-Century Leader

Beginning in late 1998, UnitedHealth stock took off once again, soaring 1,651% to late 2005. It also introduced Web-based technology to improve service for its doctors, helping them to check their patients' benefit eligibility, submit claims and review them.

In 2003, it introduced medical ID cards with magnetic stripe technology as well as the use of aMasterCard ( MA ) system and network, allowing patient benefits to be verified in seconds. The following year, it rolled out health savings accounts for employers and individuals.

"They are arguably the only company positioned to take advantage of every trend and every market inefficiency in health care," Skolnick said. "It's pretty stunning what they're able to accomplish and it's hard work."

UnitedHealth used its national scale and its cost-cutting skills to its benefit as businesses competed to bring their employees to UnitedHealth for insurance. It is now a big player in Medicare Advantage, but is cautious about joining the ObamaCare health exchanges.

After tumbling in the 2008 financial crisis, shares have risen sharply once again.

Under Hemsley's leadership since 2006, UnitedHealth has utilized its "large, diverse membership base" to gain advantages in both scale and pricing, says Vishnu Lekraj, an analyst with Oppenheimer & Co.

"They are the gold standard," Lekraj said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: UNH , MA

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