EUR 850.00 For Business Accounts Only

Morningstar | UnitedHealth Reports an In-Line 2Q as Membership Mix Skews Further to Medicare

There were no major surprises for UnitedHealth during its second quarter, and we are reiterating our $190 fair value estimate and narrow moat rating for the managed-care firm. UnitedHealth reported a 7.5% overall operating margin, which remained flat from year-ago levels, as a slightly lower medical loss ratio was offset by a slightly higher operating cost ratio. While the lower medical loss ratio is a positive, we expect this trend to reverse over the the next several quarters as utilization rates start to tick up due to a continuing mix shift toward higher-cost Medicare and Medicaid. For the quarter, employer- and commercial-based membership decreased 2% year over year, while Medicare/Medicaid membership increased 6% over the same time period.

From our perspective, we believe secular growth trends within the health insurance market will largely be driven by the higher-cost Medicare and Medicaid cohorts. The members that make up this risk pool tend to skew older and sicker, and thus, usually carry a materially high level of medical costs. With this shift in membership growth, we believe it’s essential for United to control its operating costs.

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 to long-term value generation. Positively, we believe United has positioned this business in as a key player within the healthcare market and will be the primary driver of earnings growth for over the next handful of years. For the quarter, Optum was able to drive revenue growth and expand its operating margins. We are impressed by the performance and believe these services have been highly beneficial to shareholders.