UNITEDHEALTH GROUP INCORPORATED
Background of Business
UnitedHealth Group is a diversified health care company. It provides leading managed care and
health service through its two business segments, United Healthcare and Optum. Two
segments are distinct, but complementary, in achieving its mission: helping people live
healthier lives and helping make the health system work better for everyone.
United Healthcare
United Healthcare provides health benefits services (insurance) to 49 million members globally
including corporation, government and individuals. Its products and services are provided in
four different categories: Employer & Individual, Medicare & Retirement, Community and State
(Medicaid) and Global.
The Employer & Individual offering, which is accounted for 30% of total United Healthcare
revenue in 2018, can be further broken down into fee-based (self-funded) and risk-based (fully
funded) categories. For fee-based offerings, the employers cover the medical expenses of their
employees and pay United Healthcare a fee for administrative works. For risk-based products,
United Healthcare charges a premium for every member and cover medical expenses of the
members using the revenue from premiums collected. The revenue from Medicare &
Retirement and Community and State products are accounted for 41% and 34% of the total
revenue respectively. The revenues are paid by Centers for Medicare and Medicaid Services
and/or the members as premiums. Internationally, United Healthcare Global expands its
member base to 6.2 million people in 130 countries with majority of presence in Brazil, Chile,
Columbia and Peru. The revenue from international markets made up 5% of the total revenue.
Through its broad offerings, United Healthcare maintains a leading position in both commercial
and medicare markets. This business division demonstrates double-digit growth in revenue
and generate 64% of total UnitedHealth Group’s revenue.
Optum
Optum itself is a diversified division. It offerings products and services in three main categories:
OptumHealth, OptumInsight and OptumRx.
OptumHealth owns local care facilities, such as MedExpress and Surgical Care Affiliates, builds
a network of 35,000 employed, managed, or contracted physicians, and operates payment
processing and financing services. Leveraging these capabilities, OptumHealth serves the
physical, emotional and health-related financial needs of 93 million unique individuals, provides
population health management and delivers high quality care with a substantially lower cost
than traditional care facilities.
OptumInsight provide products and services in technology, research, consulting and managed
services. Its products and services help clients from four primary market segments - care
providers, health plans, governments and life sciences companies - improve the qualify of care,
drive efficiency and reduce healthcare expenses.
OptumRx provides pharmacy care services to 65 million people in the U.S, which include the
members from United Healthcare plans and other larger employer and government plans. In
2018, it managed $91 billion in pharmaceutical spend through its network of retail pharmacies
and four self-operated home delivery pharmacies, and more than 70 self-operated specialty
and infusion pharmacies, which have the capability to deliver limited distribution drugs for
complex, chronic medical and behavioral health issues.
Investment Thesis
UnitedHealth Group serves millions of members through its network of 1.3 million health care
professionals and six thousand care facilities in the US and other 130 countries. It also
leverages its capability through Optum business to assist care providers to achieve efficiency
and improve the quality of care. In the past three years, UnitedHealth achieved strong return on
equity and between 25% to 30% of that is delivered to the shareholders in the form of
dividends. I believe that UnitedHealth Group will continue its strong growth in the upcoming
years due to:
• Strong growth potential in Medicare market
• Strong position in data analytics
• Strong cash generating ability
Its positive business outlook will translate into an increase in valuation despite some
headwinds, which are either specific to the industry or specific to UnitedHealth Group.
1. Growth in Medicare Advantage Enrollment Contribute to Top Line Growth
The membership in the United Healthcare’s Medicare & Retirement category has an average
annual increase of 17% in the past two years, which contributed to its average annual revenue
increase of 46%. As the Medicare beneficiaries continuously shift from Original Medicare plan
to private health insurance plans - Medicare Advantage plans, United Healthcare’s internal
strengths enable it to outpaced its competitors in acquiring these Medicare beneficiaries. As a
market leader with 26% of the market share, it increased its Medicare members by 515 millions
in 2018, which are 37% of the total enrollment increase in this segment. The strong growth in
membership is critical in this environment where the profits are limited by the Medicare bidding
process. Its size and strong growth enable the companies to generate more profit and cash
flow to sustain expansions. In the upcoming years, the external factors and United Healthcare’s
internal strengths will further enable it to continue strengthening its position as a leader
position.
Strong Growth in Medicare Market
The Medicare market has been growing steady. The number of Medicare beneficiaries
demonstrated an average year-over-year increase of 2.8%. Based on projection from Henry J
Kaiser Family Foundation, the total Medicare enrollment will increased by 43% and reach 85.6
million by 2035. Such growth results in a tremendous opportunity for the Medicare providers,
especially the private health plan providers. The Medicare enrollment in the various Medicare
Advantage plans has increased faster than the total Medicare enrollment. The number of
enrollees in Medicare Advantage plans doubled over the past ten years with an average growth
rate of 7.7%. The Congressional Budget Office (CBO) projects that the Medicare Advantage
enrollment will double again in the next ten years and reach ~38.9 million enrollees or 47% of
the total Medicare enrollment.
FIGURE 1: Original Medicare vs. Medicare Advantage Enrollment
50
80%
38
65%
25
50%
13
35%
0
2008 2010 2012 2014 2016 2018
Original Medicare
Original Medicare as % of Total Medicare
% of Total Medicare Beneficiaries
Number of Enrollees (millions)
Original Medicare vs Medicare Advantage Enrollment
20%
2020 2022 2024 2026 2028
Medicare Advantage Enrollment
Medicare Advantage as % of Total Medicare
Source: Centers for Medicare and Medicaid Enrollment Report; Henry J Kaiser Family Foundation report
Existing Partnership in Private Insurance Sector (Internal Factor)
As the only company carrying AARP name, an organization with 38 million senior members,
United Healthcare has ability to acquire a significant portion of beneficiaries in the Medicare
market. Within recent years, increasing number of employers (including state governments) and
unions team up with private insurers to offer employer-sponsored plans for their retirees. As a
result, they will be able to provide their retirees with the same medical benefits. The strong
partnerships United Healthcare established with employers through its Employer and Individual
business will allow it to maintain the existing members as they transition to the employersponsored Medicare Advantage plans.
Among the employers, the employers in the large employer group are most likely to offer
sponsored Medicare Advantage plans. Employers in the large employer group are defined as
companies with 100+ employees. When sum up the enrollment of top three insurers offering
products/services to this group in each state, United Healthcare has the second most
enrollees.
FIGURE 2: Top Three Insurers of Each State in Large Employer Group
*California enrollment contributes to 77% of Kaiser’s enrollment total above
Source: Henry J Kaiser Family Foundation report
However, it is important to have strong partnership not only in term of number of enrollees, but
also in term of the areas covering. Among these insurers, United Healthcare has its presence
most evenly spread out across all the states. It is one of the top three insurers in 32 states. This
number is more than doubled the presence of the second insurance company on the list, CVS
Group. In seven out of top ten states by highest medicare enrollments, United Healthcare is
one of the top three insurers serving the large employer markets.
UnitedHealth Group is one of few insurance companies that have presence in all 50 states.
Having a strong footprint in all the states gives United Healthcare the ability to acquire new
Medicare Advantage enrollees in all different states. This will allow it to grow its membership at
a rate faster than its competitors with concentrated presence in a small number of states.
Integrated Care Services Lower Prescription Drug Cost
UnitedHealth Group is a diversified business, which provides health benefit services and
pharmacy care services. Through its in-house pharmacy care services, OptumRx, it is able to
drive down the out of pocket costs for its members. After comparing the prescription drug
coverage under $0 premium Medicare Advantage plans offered by top private insurance
companies (United Healthcare, Humana, BCBS, CVS (Aetna), Kaiser Permanente, WellCare
Healthcare and Cigna) in three selected counties with most of Medicare participants - Los
Angeles, Miami and Maricopa (Arizona). The members of United Healthcare plans pay the
same or less for prescription drugs through preferred mail order services for 90-day supply in
all drug tiers than the members from other insurance plans. In selected regions, the out-ofpocket costs are also lower for generic drugs and standard mail orders (90-days supply). With
the pressure from increasing drug costs, the ability to drive down out-of-pocket prescription
costs will enable United Healthcare to attract more potential enrollees. As United Healthcare
continues to grow its member base, it will have more negotiating powers to drive down prices
further.
2. Data Powerhouse Enable UNH to Go Beyond
In the recent years, the healthcare industry is under increasing pressures to shift into a valuebased model. To enable such shift, data is the key. However, when it comes to data, we need
to ask us two questions:
1. How complete are the data?
2. What do we do with the data?
Completeness of the Data
In order for data to be useful, they need to represent the profiles of members from diverse
demographics and the activities of the entire healthcare value chain. As a diversified healthcare
companies, UNH puts three distinct, but complementary, business segments under one roof traditional healthcare insurance (United Healthcare), pharmacy care services (OptumRx) and
care delivery (OptumHealth) segment. As the market leaders in their respective segments, their
offerings touch millions of patients’ lives across the entire healthcare industry. Collectively, they
obtain clinical and claim data, such as inpatient and outpatient claims, pharmacy claims,
laboratory results and provider pricing, from 200+ million members and providers across all 50
states. Such complete set of data holds the answers and insights to many pressing issues.
UNH’s unique business structure positions it in the center of data. Its position is unmatched by
any of its competitors. Realizing the benefits of such business structure, a few of insurance
providers attempted to achieve the same structure through vertical integrations. Two recent
deals are the merger between Cigna and Express Scripts and the merger between Aetna and
CVS. However, these newly formed corporations won’t post threats to UNH because they will
still need time to integrate their technology platforms and establish a sustainable business
model.
Utilities of the Data
Obtaining the data is just the first step. The key difference is determined by how people
leverage the data. UnitedHealth’s unique capabilities allow it to derive insights from data and
implement the insight-based recommendations. During the process, it is able to improve
patient outcomes and reduce the medical expenses.
United Health’s secret weapon is OptumInsight, which specializes in data analytics. When it
comes to healthcare data, 80% of the data are unstructured, which create challenges to
perform further analyses. OptumInsight has the capability to aggregate unstructured data in
different electronic medical records softwares from a large number of care providers. Its natural
language processing (NLP) capability enables the computers to interpret and organize the
unstructured data into actionable categories.
Combining NLP with advanced artificial intelligence (AI) technology, OptumInsight can
construct a complete view of the health profile of members and populations, which enables a
whole-person approach to health care. For members, this approach can help to identify
undiagnosed conditions and risks of its members based on the integrated healthcare data.
Upon early detections, care providers can suggest personalized care options. For care
providers, they can more effectively improve coordinated care, patient outcomes, population
health management, and clinical performance when all the information are in one place.
Furthermore, once OptumInsight identifies inefficiency in the healthcare system and gaps in the
patient care. UnitedHealth Group is in a unique position to quickly turn insights into actionable
changes through its business units that touch all parts of the health care industry. Combining
insights from OptumInsight and integration of various business segments, there are potentials
to change health care from a defensive approach to a preventative approach and change the
treatment focus from quantity to quality. As a result, it will improve the quality of life and reduce
the potential high healthcare expense in the future.
In addition, Optum also works with other key players across the industry to help them achieve
the same results. Currently, OptumInsight serves 80% of U.S hospitals, more than 100,000
physicians, 75% of U.S health plans, government agencies in 36 states and more than 200 life
science organizations. The benefits OptumInsight delivers are widely recognized by the players
in the healthcare industry. The recognitions are reflected in the revenue increases of 10% and
11% in 2017 and 2018 respectively, which are mostly due to organic growths. Such growth will
likely continue as the industry continues to face more pressures regarding efficiency and
healthcare spend.
FIGURE 3: Year-Over-Year Revenue Growth
Source: UnitedHealth Group 10-K
As a pioneer in combining health benefit, pharmacy care, care providers and data analytics
service under one umbrella, UNH can leverage its data and implement actionable solutions to
enable value-based approach and go beyond the roles of traditional heath benefit provider.
3. Cash Flow and Capital Structure
In the health care benefit segment, obtaining a high number of member enrollment is the key to
success. The commercial insurance products and services are either risk-based (fully funded)
or fee-based (self funded). The profit of risk-based products is limited because the Patient
Protection and Affordable Care Act requires health insurers spend 80% - 85% of the collected
premium on medical costs. Further, there is a shift in the industry from risk-based products to
fee-based products - the employers themselves will bear the spend risk, the insurance
companies will charge a fee for administrative activities. The profit margin is small for feebased products as well. To obtain high profit or cash flow in such environment, scale and size
matter. United Healthcare offers a wide range of products and services, which allow it to be the
largest insurer by enrollment and revenue in the U.S. With its scale, UnitedHealth Group has
been generating substantial cash flows. The cash flows UnitedHealth Group generated from its
operations enable it to cover all of its contractual obligations, build out its highly profitable
Optum business through strategic acquisitions, and return profits back to shareholders.
FIGURE 4: Cash Flow from Operating Activities vs. Expenditure
Cash Flow vs Expenditure
$USD Millions
$20,000
$15,000
$10,000
$5,000
$0
2013
2014
2015
2016
Debt Repayment
PP&E
Cash for Acquisition
Cash dividends paid
2017
2018
Cash Flows from Operating activities
Source: UnitedHealth Group 10-K
Optum acquired a number of companies since 2017. Upon the completion of the acquisition of
DaVita Medical Group, one of nation’s leading independent medical groups, OptumHealth
surpassed Kaiser Permanente to become the largest employer of physicians in the U.S. As
Optum expanded into more markets, OptumHealth and OptumInsight continue to deliver
strong growth in operating profit. In 2018, their operating margin is almost three times more
than that of either United Healthcare or OptumRx. They contributes to 27% of the total
operating profits, which increased from 18.5% in 2013.
FIGURE 5: Optum Acquisitions from 2017 to 2019
FIGURE 6: Earning from Operations by UnitedHealth Group Business Units
Earnings from Operations by UNH Business Segments
Earnings from Operations ($USD Million)
$18,000
$13,500
$9,000
$4,500
$0
2013
2014
2015
2016
2017
2018
Earnings: UnitedHealthcare
Earnings: OptumRx
Earnings: OptumHealth + OptumInsight
Source: UnitedHealth Group 10-K
Furthermore, UnitedHealth Group also focuses on returning earnings back to the shareholders.
On average, the annual dividends UnitedHealth Group paid to its shareholders were around
27% of the net earnings from 2013 to 2018. The return on equity in 2018 is 24.4%, which
increased from 17% in 2013.
In long term, Unitedhealth Group leverages its core business, medical insurance, to kick start
its expansion into other segments with unmet needs. Strong growths from these segments
enable UnitedHealth Group to further strengthen its core business and establish itself as
market leaders in different markets.
4. Risks:
Amazon’s Expansions to Healthcare
Amazon made headline when it announced its joint venture with J.P. Morgan and Berkshire
Hathaway in an effort to replace the private insurers and manage the medical expenses of their
own employees. Since then, Amazon launched its over-the-counter medication brand, Basic
Care, and acquired online pharmacy, PillPack. Its e-commerce platform also started to carry
home and professional medical supplies. With its size and influence, people believe Amazon
can be disruptive to the healthcare industry. In response, the stock prices of private insurance
companies plummeted.
However, this is not Amazon’s first attempt entering the healthcare space. It entered the
pharmacy business through drugstore.com back in 1999, but backed out a few of years later
after facing challenges from regulations, logistics and the leading pharmacy benefit managers,
such as Medco Health Solutions. The industry is more consolidated than ever, the existing
players have bigger influence than before. Even though Amazon is a lot bigger now, it will still
face the similar challenges. Amazon’s medical supplies business has little luck to land sourcing
agreements with large hospitals and its distribution networks are not equipped to handle
temperature-sensitive pharmaceutical products.
It is possible that Amazon will cause some disruptions to the industry. However, in order to
revamp the healthcare value chain, Amazon will need a partner with a strong industry footprint
to help break in the industry and execute on its strategy. Amazon’s expansion into healthcare
should be perceived more as an opportunity than a threat to a market leader, like UnitedHealth
Group, which is the largest private insurer, third largest pharmacy benefit manager, the largest
employer of physicians, the owner of multiple care facilities and host of largest clinical
database. In return, Amazon’s strength in analytics and operating efficiency can help
UnitedHealth Group to solidify its market leader position against the constant pricing pressure
in the industry.
Uncertainty in the Regulatory Landscape
As 2020 Presidential Election is approaching, it creates uncertainties for the Healthcare
Insurance industry. Along with Bernie Sanders, a number of Democratic presidential
candidates believe that Medicare for All is the way to fix our current dysfunctional healthcare
system. This plan will eliminate the private insurance companies and shift all the healthcare
responsibilities to the government. The goal is to reduce high healthcare expenditure in the US.
However, at the same time, the government will incur significant costs to finance such
program. The cost will be in the billions over a three-year period. The government will likely
need to raise money through additional tax revenue, which translates into higher tax rates.
In theory, Medicare for All will provide tremendous benefits to the Americans and it will have
positive changes to the healthcare system. However, it is not likely that all the financing details
and executing process will be worked out in the near future. Once the details are being worked
out, it will make sense to roll out in phases, which will allow a chance to improve the process
and ensure a more successful roll out. It will take a long time to achieve something in such
scale.
Most likely, it will be too much burden for the government to take on the healthcare
responsibility of all Americans. It will be more feasible to partner with the private insurance
companies to reform the healthcare system. Besides the supporters of Medicare for All plan,
the majority of the Democratic Presidential candidates believes in some forms of involvements
from private insurance companies. This is also the same belief shared by the Republican office.
The private insurance companies have years of expertise and experience in this space. It will
be beneficial to have experts involvements in fixing any issues. With proper regulations and
government guidances in place, the private insurance companies can play a critical part to
help carrying out the healthcare reform.
With that say, UnitedHealth has the capability to be a valuable partner to the government. With
its size and expertise in all different parts of the healthcare industry, it also has the ability to cocreate solutions with the government or deliver solutions to the health providers, patients and
administrative agencies. At the same time, in order to stay competitive and relevant,
UnitedHealth needs to be flexible to changes and constantly adjust to stay ahead of the curve,
which is something UnitedHealth actively pursues. We can see that through its acquisitions
over the years, which help UnitedHealth to have a broader reach to different parts of the
business and build the competitive advantage in the data driven world.
5. Valuations
Conclusions
UnitedHealth Group has a broad reach in multiple segments of the healthcare industry. It is the
market leader in providing health benefit service, pharmacy care service, care provider service
and industry insights. Its strong offerings and partnership with private employers enable it to
stay competitive in the Medicare market. With the strong cash flows generated from the health
benefit and pharmacy care service segments, it continues to expand its offerings in the data
analytics and industry insights, which allows it to further strengthen its market leader position
and deliver growth and values back to the shareholders.