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Commentary

UnitedHealth Group’s Earnings Call


     
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Tuesday was a big day for a few big-cap health stocks: Johnson & Johnson and Novartis both reported Q2 earnings. I participated in the UnitedHealth Group earnings call.

Or, perhaps I should call it the Optum earnings call, because the presentation really focused on this fast growing business, which UNH defines as ”an information and technology-enabled health services business serving the broad health care marketplace, including payers, care providers, employers, life sciences companies and consumers.”

Even though Optum accounted for only $7 billion of $25 billion revenues in the 2nd quarter, UNH clearly expects it to keep growing quickly under a new CEO, Larry Renfro, appointed just two weeks ago. UNH created the Optum “master brand” as recently as last April, when it bundled all of its health services businesses under that name.

This included rebranding Ingenix, a business about which I last wrote in 2009, when it was in trouble with the (then) Attorney-General of New York, Andrew Cuomo. At the time, my entire series of articles (here, here, and here) on the struggle between UNH and Mr. Cuomo lamented the fact that New York State was effectively destroying a business that was providing a valuable service. UNH seems to have reinvented the business successfully since then.

Much of Optum’s revenue comes from other payers, that is, UNH’s competitors. For how long will they be happy to pay their competitor to feed its fastest growing business? It reminds me more than a little of the tension that Medco suffered when it was owned by Merck, which spun it off in 2003.

(One analyst asked whether the UNH management thought that transactions by its competitors, such as WellPoint’s recently announced acquisition of CareMore, or Highmark’s planned purchase of West Penn Allegheny Health System, follow a similar logic to UNH’s expressed goal of increasing integration of care in the post-reform environment, to which UNH management responded that they believed their competitors were behaving “rationally”.)

Tom Carroll of Stifel Nicolaus asked whether the company was concerned about states pushing back on rate hikes, to which Gail Boudreaux, president of UNH’s employer and individual lines of business, answered that UNH would price its plans according to projected claims trend. Fair enough, but Mr. Carroll’s question reflected concern that states might not allow premiums to increase at an adequate rate, given the increasing politicization of health care. This continues to be a major concern of mine, as I wrote in my previous entry on the perverse incentives that the Patient Protection and Affordable Care Act pose for state politicians.

A couple of other analysts questioned how UNH was responding to PPACA’s forthcoming Health Benefits Exchanges, for which the U.S. Department of Health and Human Services recently released regulatory guidance. Unfortunately, no-one on the call seemed to recognize the risk that many of these exchanges, which are supposed to spin billions of dollars of tax credits into pure gold for health insurers, will not be anywhere near ready for certification by the Secretary by the end of 2012. Indeed, huge states like Texas and Florida are actively hostile to any collaboration with an exchange. UNH management ducked questions about how they are responding to the HHS guidelines, but left little doubt that their government-relations team is working overtime to shape the firm’s response within the 75-day deadline set for comments.

My conclusions:

  • Optum will continue to make well focused acquisitions;
  • UNH will continue to keep quiet about its lobbying efforts to shape the post-PPACA landscape;
  • Public budget crises will make the Medicaid managed-care business look much less attractive than it has been; and
  • UNH and (most) Wall Street analysts continue to ignore the likelihood of PPACA’s defeat, either through the Supreme Court or the election of a new president in 2012.

John R. Graham is Senior Fellow at The Independent Institute.






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