Friday, July 17, 2015

United Health Group’s Q2 Earnings: Steady Growth, Obamacare Results Unclear


UnitedHealth Group (NYSE: UNH) reported its second quarter results yesterday. The results show an enterprise that is firing steadily on all cylinders. UNH has two main businesses: UnitedHealthcare, the health insurer; and Optum, a portfolio of businesses that provide services crunching Big Data to customers that include other insurers.

From the press release:
  • Second quarter revenues grew 11% year-over-year to exceed $36 billion,
  • UnitedHealthcare grew to serve 1.6 million more people domestically in the past year, including 175,000 people in the second quarter
  • Optum revenues of $13.6 billion grew 16% year-over-year; operating earnings Increased 19%
  • Second quarter net earnings grew 15% year-over-year to $1.64 per share, with cash flows from operations of $1.2 billion.
During the earnings call, management was careful to duck questions that might have invited them to comment on the whirlwind of mergers and acquisitions rocking the industry. They expect the previously announced (March 30, 2015) takeover of pharmacy benefit manager Catamaran to close in a couple of weeks. The newly acquired PBM will not have an impact on 2015 earnings, as its contribution this year will be eaten up by closing costs and paying down debt. It looks like share repurchases will recommence once the acquisition debt is whittled down.

There were not many surprises, except that the “medical care ratio” improved to 81.4 percent, an improvement of 20 basis points. However, this was slightly disappointing to analysts, many of whom expected the ratio to be under 81 percent.

This ratio is the quotient of revenues divided by medical costs, although I have written it in quotation marks because the regulated term is “Medical Loss Ratio,” which was newly defined by Obamacare. There may be a difference in calculation between the ratio reported in the earnings and that reported to regulators. (Indeed, during the call, a UNH executive referred the “coordinated care ratio,” which is a remarkable term because not all of UNH’s plans are characterized by coordinated care.)

What was not disclosed? The medical care ratio for plans in Obamacare’s exchanges. The reporting of only a consolidated ratio, without breaking it down by segment, frustrated many analysts on the earnings call. Matthew Borsch of Goldman Sacs indicated that UNH formerly reported the ratio by segments. Everyone understands that health plans are losing money on the exchanges and we’d like to know exactly how it’s impacting their businesses.

Nevertheless, UNH continues to succeed under the new health law. The quarterly dividend was $0.1625 in May 2015 (the first quarter after the Affordable Care Act was passed) and has increased steadily to $0.50 in June 2015.

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