UnitedHealth registers strong 2016 finish; foresaw Trumpcare downside, potential, early on

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With conjecture churning about how Republicans might replace the federal health law, the CEO of UnitedHealth Group Inc. (Minnetonka MN) offered no specifics Tuesday (January 17, 2017) but said he sees the potential for healthcare changes focused on state-based markets, flexible Medicaid programs and well-structured, high-risk pools.

@UnitedHealthGrp 4th-quarter tops estimates for revenue/profit, thanks to its @Optum division Click To Tweet

Still, the nation’s largest health insurer has “no better sense than anyone else concerning the timing or ultimate actions with respect to the Affordable Care Act,” (ACA) said Stephen Hemsley, the CEO at UnitedHealth, during a call with investors to discuss fourth-quarter results.

“We remain positive and constructive with respect to what ultimately evolves in the next phase of healthcare change,” Hemsley said, according to the Minneapolis Star Tribune.

The promised repeal and replacement of the ACA by Republicans at the federal level has created ambiguity for insurers about the individual and Medicaid markets that have been reconfigured by the law.

UnitedHealth has a large Medicaid business, but has reduced its exposure to the individual market where health-law changes have generated losses for carriers.

Due to financial losses, UnitedHealth’s insurance division abandoned most of the new health-exchange marketplaces for individuals that were created by the ACA. Even so, Hemsley said that exchanges might persist “where states choose to sustain them.”

“We believe, all of these, taken together, can represent effective, local, state-based coverage systems, which can well accommodate those currently within the ACA individual exchanges, as well as serve as channels for further expanding coverage if that remains the focus,” Hemsley said. “We see this approach as being simpler, offering more flexibility, more choice and more affordability to both consumers and state and federal sponsors.”

Beyond his general comments, Hemsley said he would not discuss specifics about what he suspects the near future holds in store. Republicans last week began the process of repealing the ACA, and President-elect Donald Trump has called for a replacement measure to be adopted concurrently with the repeal.

Some Republican plans have called for the creation of high-risk pools that, before Obamacare, provided a source of insurance, although with higher prices and coverage limitations, to people with preexisting medical conditions. One of the most popular changes under the ACA was a ban on health-insurance rules that allowed companies to deny coverage to individuals with a history of health difficulties.

Getting back to the numbers, UnitedHealth reported fourth-quarter results that topped analysts’ estimates for revenue and profit, driven in part by growth at its Optum division. Earlier this month, United announced the $2.3-billion acquisition of Surgical Care Affiliates that will make Optum one of the largest operators of surgery centers in the US. For 2016, Optum increased revenue at a faster clip than the company’s insurance business.

During the fourth quarter, medical cost trends at UnitedHealth were curbed in part due to reduced individual market pressure, the company said in a news release. UnitedHealth provided benefits to more than 44 million Americans at the end of the fourth quarter, up from about 42 million at the end of 2015.

“We are privileged today to serve more people in more ways than ever before,” Hemsley said.

For the latest quarter, after adjusting for one-time charges, earnings per share came in at $2.11–better than the $2.07 per share predicted by analysts.

UnitedHealth affirmed its 2017 financial outlook, including estimated revenue of $197 billion to $199 billion, net earnings of $8.75 to $9.05 per share, adjusted net earnings of $9.30 to $9.60 per share, and operating cash flow from of $11.5 billion to $12 billion.

In trading Wednesday (January 18, 2017), United shares were down 3% for the week to $157.74. Aetna fell 1% to $120.97; Anthem slipped 1% to $147.22; CIGNA gave up 3% to $141.97; and rounding out the “Big 5,” Humana added 2% to $206.11.

Steve’s Take:

After the presidential election results became clear, 2016 suddenly became a momentous, jarring year in the US and around the globe. Stunned perhaps the most was the healthcare industry, yet few expect anything different in performance at steady, health-insurance giant UnitedHealth in 2017.

The nation’s top insurer was the first of the big five health insurers to report fourth-quarter earnings, and it largely punted on the industry’s 64-dollar question: What does Trumpcare hold in store for American health care? CEO Stephen Hemsley emphasized that the company has “no better sense” than anybody else about what might happen to the Affordable Care Act.

With immense changes to healthcare laws likely to come in the very near future, UnitedHealth will have to work hard once again to adapt to new requirements while trying to serve its current clients without a glitch. Entering Tuesday’s fourth-quarter financial report, UnitedHealth investors wanted confirmation that the insurer would be able to deliver solid gains in revenue and earnings, and UnitedHealth delivered on that score. In fact, the company seems mildly optimistic about its ability to keep growing in 2017.

Though it may deny additional insight, the company seems to have made better preparations than its contemporaries, notes Max Nisen at Forbes. Its profit beat analysts’ expectations, helped by an early pullback from the ACA’s individual exchange markets and a push for diversification. The insurer looks better positioned than many rivals for whatever might happen.

The highlight of the quarter was the outperformance of the company’s Optum unit, which does everything from managing prescription drug benefits to providing urgent care. Its operating earnings gained 18% in the fourth quarter and accounted for the majority of the company’s overall operating profit. The only other time that happened was in the fourth quarter of 2015, when the insurance business took a large charge in anticipation of Obamacare-related losses.

Optum may not forfeit its uppermost position anytime soon. As mentioned earlier, UnitedHealth is strengthening its commitment to that business via its purchase of Surgical Care Affiliates according to Bloomberg, which could bolster the unit’s margins and revenue and will give it a presence in the growing outpatient surgery market. Other large insurers derive a greater portion of their revenue and profit from insurance alone. Optum’s diversification and growth prospects are even more valuable in the face of possible Trump-related disruption to the industry.

While other big insurers were relatively slow to pull back from the ACA’s individual insurance exchanges as their losses mounted, UnitedHealth started taking steps to limit its losses in late 2015 and announced a near-total exit in April 2016. That’s now paying dividends—literally!

The company does not expect to lose money on the exchanges in 2017 after taking large losses last year. Its withdrawal is helping push down its medical loss ratio, an important metric that tracks the percentage of premiums an insurance company spends on health care. A higher ratio means lower profits. The company’s quick decision-making should both boost performance this year and help limit exposure to the eventual fate of the ACA.

The overall focus of the company’s insurance operation should also be stabilizing. Optum may be the star of the show at the moment, but the insurance business posted an impressive 13% gain in both revenue and operating profit in 2016. UnitedHealth has concentrated on increasing its share of enrollment in privately administered Medicare plans, adding 625,000 members in 2016 without any acquisitions.

Some combination of the GOP’s traditional affection for privatization and Trump’s pledge to leave Medicare mostly alone should help that effort continue to pay off. The company is also the country’s biggest provider of insurance to employers, which should also be relatively secure in the event of an ACA repeal.

Medicaid may experience greater disruption given it was expanded under the ACA. The fact that it’s a smaller piece of the pie for UnitedHealth may come as something of a relief.

It’s problematic, to say the least, for investors to plan for something as unpredictable as a Trump presidency. And yet UnitedHealth shareholders were generally positive about the fourth-quarter news. Although share prices slipped a bit on Wednesday, they were not out of line with fellow insurers Cigna, Aetna and Anthem.

Steve's Take: @UnitedHealthGrp appears poised to ride out the #Trumpcare storm better than most Click To Tweet

Whether by foresight and intent, or just plain luck, UnitedHealth appears poised to ride out the ensuing storm better than most.