EUR 850.00 For Business Accounts Only

Morningstar | UnitedHealth Reports a Strong Quarter as Optum Powers the Firm’s Performance

Although UnitedHealth is one of the best known health insurers, the firm’s current and future performance will be driven in large part by its Optum healthcare services business. With that as the backdrop, we are pleased with the performance of this business as United was able to fuel 11% revenue growth while expanding margins 587 basis points to 8.12% for this segment during the quarter. Considering these developments, we plan to adjust our modeling assumptions to account for the moderately better health cost performance and expect a corresponding moderate increase in our $190 fair value estimate.

We are also reiterating our narrow moat rating for United. As with the previous quarters, management was keen to highlight the performance of its Optum operations. Management clearly sees this varied healthcare service business as a key long-term value generator. Additionally, the firm reported a solid quarter for its core MCO business as it continues to execute at a high level. The firm’s medical loss ratio dropped 37 basis points. Even though the reinstatement of the insurer tax helped this metric during the quarter, we are impressed with the strong membership growth that accompanied the decent profit performance.

The firm reported a 8.12% overall operating margin, which remained flat from year-ago levels, as the lower MLR was offset by a slightly higher operating cost ratio. While the development of a lower MLR is a positive, we believe it's essential that United keep its centralized costs in check. Over the course of the next several years, we expect Medicare and Medicaid membership to continue to increase and the firm will need to offset the high medical costs of these cohorts. The members that make up these government-sponsored risk pools tend to skew older and sicker, and thus, usually carry a materially higher level of medical costs. With this shift in membership growth, we believe it’s essential for United to control its operating costs moving forward.

Positively, we believe United has positioned its Optum business as a key player within the healthcare market and will be the primary driver of earnings growth over the next handful of years. We are impressed by this division’s performance and believe these services will only grow in importance as healthcare market stakeholders seek to curb costs and drive efficiency. The continued strong performance of this division will be highly beneficial to shareholders, from our perspective.