UnitedHealthcare 2nd quarter sparkles; but time to figure out how Centene, Molina exploit Medicaid?

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The News:

UnitedHealth Group Inc.’s (Minnetonka MN) second-quarter earnings jumped 11% to beat analysts’ expectations even though the nation’s largest health insurer took a bigger hit than expected from coverage linked to the Affordable Care Act, according to the Associated Press.

@UnitedHealthGrp second-quarter earnings jumped 11% Click To Tweet

The bellwether behemoth said that losses from its ACA-compliant individual business came in $200 million above projections, which means the company now expects to lose around $850 million this year from what amounts to a small slice of its total operation.

But another strong gain from UnitedHealth’s Optum segment helped push the company’s total net income up to $1.75 billion from $1.59 billion in the previous year’s quarter.

Health insurance remains UnitedHealth’s largest business, but the company has been focusing more on growing Optum, which provides pharmacy benefits management and technology services and also operates clinics and doctor’s offices. Operating earnings from that segment surged 46% to $1.26 billion in the second quarter, helped by the acquisition of pharmacy benefits manager Catamaran Corp.

Meanwhile, operating earnings fell 4% for the company’s UnitedHealthcare segment, which sells individual and employer-sponsored benefits.

UnitedHealth and several other insurers have reported struggles with business sold on the ACA’s exchanges, which opened for enrollment in the fall of 2013. The exchanges delivered a customer base that generated more claims than expected initially. Companies also have been hurt by a shortfall from temporary government support programs and by high-cost patients who signed up for coverage outside regular enrollment windows.

UnitedHealth said earlier this year that it was planning drastic cutbacks in its participation in the ACA’s exchanges in 2017. The insurer had expanded rapidly into the market and sold coverage on exchanges in 34 states this year. But it only plans so far to offer policies in three next year: Nevada, Virginia and New York.

UnitedHealth’s new Harken Health subsidiary will sell coverage on exchanges in Chicago, Atlanta and South Florida.

CEO Stephen Hemsley told analysts his company would have “no meaningful exposure” next year to the exchanges.

UnitedHealth covered about 820,000 people on the exchanges at the end of the second quarter, which is less than 2% of its total enrollment of 48 million.

Overall, UnitedHealth’s earnings, adjusted for amortization costs, totaled $1.96 per share. Analysts expected, on average, earnings of $1.89 per share, according to Zacks Investment Research. Shares closed up 3% so far on the week to $191.75.

Steve’s Take:

The giant bellwether from Minnetonka has proved conclusively it can make money in the health insurance business. But when it just couldn’t figure out how to make money after years of trying, and every indication that Obamacare was toast, the company said hasta la vista to the ACA exchanges. Well, all but in three of the 34 it once served.

Even so, however, UnitedHealth has been given a virtual free pass for any lack of social conscience, and maybe even a kudo or two, for abandoning the exchanges. Business is business, right?

But now, despite controlling both houses of Congress, President Donald Trump has been slowly, gradually raising the white flag on his repeal and replace campaign promise and that sets the stage not just for a reprise in the death of the ACA exchanges, but the restoration of what was gauged as about an $800-billion chunk of Medicaid business, and that ain’t chicken feed–even to UNH.

So, having figured out how to make a lot of money in non-exchange business, am I really hearing company CEO Steven Helmsley saying essentially, “we’re going to quit while we’re ahead? Somehow, that wouldn’t be what I would want to hear were I a shareholder, which I am not.

The Medicaid pie is even bigger than the Medicare one and companies like Centene Corp. (St. Louis MO) and Molina Health Inc. (Long Beach CA) have figured out how profit from the exchanges, why can’t UNH? Uh, Mr. Helmsley? We’re addressing this question to you?

The answer to this question, which I recommend Mr. Helmsley read if he hasn’t, lies in the prescient analysis by Edmond F. Haislmaier last year for the Heritage Foundation, where he was a senior research fellow. All of which I am now pulling from that piece for the benefit of not just our readers but especially for UNH shareholders.

Haislmaier contends that it is crucial to understand how the new ACA exchange market differ from other health-insurance markets.

The vast majority of policymakers, health insurers, and the broader public have treated the exchange market as a subset of the individual health-insurance market. Yet the two markets actually operate differently, and that is mainly because Obamacare’s coverage subsidies apply only to the exchange market.

The exchanges offer premium tax credits to enrollees with incomes between 100% and 400% of the Federal Poverty Level. However, because each enrollee’s credit is linked to the premium for the area’s second-lowest-cost Silver plan–and enrollees cannot receive more than that plan costs–the credits typically phase out at around 250% of FPL for single individuals and between 300 and 350% of FPL for two- and three-person families. Also, enrollees with incomes below 250% of the FPL can benefit from reduced cost sharing if they pick a Silver plan, with the federal government separately paying their insurer an additional subsidy to offset the increased expense.

Obamacare’s subsidies are heavily skewed toward the lower end of the income scale, in other words. Further, people who don’t qualify for subsidies can often find more choice of carriers and plans elsewhere.

Given all of this, it is no surprise that the most recent exchange enrollment report from the Department of Health and Human Services shows that 84% of exchange enrollees qualify for tax credits, and that 67% (two-thirds) of that subset are also enrolled in reduced-cost-sharing plans.

What this means is that the exchange market is much more similar to the Medicaid managed-care market–in which private plans contract with state governments to cover the poor, and aim to keep costs down by limiting their provider networks to doctors and hospitals willing to accept lower payment rates–than to the traditional individual-coverage market.

Importantly, some insurers, notably Molina and Centene, picked up on that difference between the two markets, while United and others apparently did not.

Prior to 2014, Molina had very little individual-market business. Yet the company began offering exchange coverage in 2014 in all nine states where it had Medicaid managed-care contracts. During its first 18 months of offering exchange coverage (the available data end in June of this year), Molina’s individual-market enrollment grew from 28,000 to 265,000 individuals, and the company reports that its exchange business is profitable.

Centene is also a Medicaid managed-care insurer that previously had few individual-market enrollees. In its first 18 months on the exchanges, Centene’s individual-market enrollment grew from 22,000 to 210,000 individuals, and it, too, says its exchange business is profitable.

So, why has exchange coverage been profitable for Molina and Centene, but not for United?

The explanation appears to be that, unlike United, Molina and Centene anticipated that Obamacare’s subsidy structure and benefit mandates would produce an exchange market that looked more like Medicaid managed care, and designed and priced their plans accordingly.

Bottom Line:

All the above is, of course, subject to a huge proviso, namely, that the Trump administration won’t scrap the ACA’s cost-sharing subsidies that help low-income Americans afford insurance. A return to Obamacare would ideally happen after a bipartisan fix addressing other insurer concerns, says Max Nisen for Bloomberg. That’s quite a condition; President Donald Trump has signaled he’d rather see the ACA fail than fix it.

Steve's Take: #Bipartisan legislation can address the flaws in #Obamacare Click To Tweet

But the idea of a bipartisan fix isn’t as far-fetched as it once was. Repeal-and-replace is likely dead. GOP senators are calling for hearings on market stabilization. And sabotaging the healthcare system would be shockingly heartless and could backfire politically. Some fundamental flaws in Obamacare’s basic policy design are well documented and largely accepted by both political camps. Experts such as Mr. Haislmaier have insights for how such bipartisan legislation can address them.

A test of the administration’s intentions will come later this week, when a cost-sharing payment is due. UnitedHealth should pay attention and then Mr. Hemsley can opine on any reconsideration he may have on re-joining the ACA exchanges. After all, it’s never too late to make more money for one’s shareholders.

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