UnitedHealth Group (UNH, Financial) detracted from performance due to investor concerns about Medicare premiums as well as post-COVID medical cost trends. Medicare enrollment should continue to grow at double-digits at UnitedHealthcare. Meanwhile the Company’s Optum segment should be able to help bend the cost curve if indeed post-COVID volumes pick up to above pre-COVID levels. In any case, we do not think the long-term normalized trend of medical care in the U.S. has changed substantially and would look to add to our new position on any continuing short-term concerns.
UnitedHealth Group
UnitedHealth Group is the largest healthcare service provider in the U.S., managing over $250 billion in healthcare spend and serving over 165 million people. The Company has first-mover advantage at providing integrated service offerings aimed at bending the cost curve of providing access to care that improves the health outcomes for its members. Over the past five years or so, the Company has aggressively expanded beyond traditional health benefits by making several key acquisitions in large and adjacent healthcare verticals including pharmacy benefits, walk-in care clinics, specialized outpatient service providers, and physician practices. As much of the industry plays catch-up to United’s solutions, we expect United’s addressable market will continue to expand, along with the aging of the general U.S. population. The Company should be able to drive double-digit earnings growth, through a combination of competitively differentiated operating performance as well as capital deployment at attractive multiples.
After making several important acquisitions over the past 5 to 10 years, UnitedHealth Group segmented its business into two well-known subsidiaries: Optum and UnitedHealthcare. Like much of the healthcare benefits industry, the Company formerly had a heavy reliance on contracting with outside service providers for care. The Company’s health care benefits group now more exclusively relies on its internal Optum group to increasingly provide value-based care, rather than fee-based, while Optum offers its services to all comers often on a fee-basis. For example, Optum acquired urgent care facilities to help address all the patient issues that might require something more than a regular doctor visit yet are not serious enough for the emergency room (ER). By routing UnitedHealth plan members to Optum-owned urgent care clinics, those patients receive proper care while the health plan incurs substantially less cost than the ER visit. Many healthcare plans still do not cover this sort of outpatient “gap” in care and are at a disadvantage compared to UnitedHealthcare. Of course, while the Company’s plan designs often exclusively rely on Optum, Optum is still free to offer its services to outside healthcare plans, which helps the Company maximize the utilization of those Optum assets. For example, the Company has over 26 million people covered by its employer and individual plans; however, the entire Optum umbrella consists of nearly 100 million customers. Many of those outside plan customers come to Optum via the pharmacy benefit manager ([PBM] OptumRx) which the Company has scaled into one of the largest PBMs in the U.S. through acquisition and share gains.
UnitedHealth Group serves a couple of very large addressable markets that remain relatively underpenetrated. OptumHealth generated $40 billion in revenue during 2020 and has a nearly $1 trillion addressable market. The subsidiary employs (or is affiliated with) 53,000 physicians, more than double the number from 5 years ago, and the Company expects to add another 10,000 physicians during 2021. This aggressive consolidation of the highly fragmented physician market has helped drive out administrative and operational inefficiencies (costs) while maintaining or improving the health outcomes of patients. OptumRx is the Company’s PBM that pools together over $100 billion in purchasing power to lower the net cost of drugs for beneficiaries. After acquiring Catamaran in 2015, the Company insourced its pharmacy benefit from Medco Health (now part of Cigna) and turned the business into one of the top-3 scale buyer of pharmaceuticals. OptumRx is focused on faster growing segments such as specialty pharmacy and infusion services, and although margins are often lower than the rest of the business, our experience is that PBMs are not particularly capital intensive and generate high returns as a result.
As for UnitedHealthcare, they handle roughly 20% of the U.S. Medicare Advantage plan population. With over 10,000 baby boomers aging into qualifying for the U.S. Medicare system every day, enrollment growth has compounded at over 10% for the past 5 years and should continue at similar rates through 2025. The Company achieves this market share and growth by consistently maintaining medical costs that are below traditional Medicare. The Company also serves about 26 million employer and individual members, one of the largest private payer books in the industry. Many of these members eventually find their way into the Company’s Medicare Advantage program, which enables the Company to have a much more detailed picture of member health status over time, allowing for more personalized, effective, and lower-cost care.
The combined scale of the Company’s business segments along with supportive demographic trends in the U.S. should help the Company sustain double-digit earnings per share growth for the next several years. UnitedHealth Group should be able to supplement this growth through continued consolidation of the highly fragmented healthcare industry. The stock currently sports a below-market multiple, despite peer-leading profitability metrics and unrivaled scale, which made it an attractive addition to the portfolios during the quarter.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners third-quarter 2021 shareholder letter.
