Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Does UnitedHealth Make Money?

daniel , , , , , , , , ,

UnitedHealthGroup (NYSE: UNH) has bucked the trend by returning to Obamacare exchanges in Illinois, Montana, Mexico, Oklahoma and Texas.

It might also stay on exchanges in New York and Nevada, The Star Tribune reported. This indicates that United Health Group is either making enough money to take the risk of staying on the exchanges, or it needs the extra cash the exchanges might provide.

Another reason why UnitedHealth wants to stay on the exchanges is to avoid conflicts with state governments that can threaten lucrative Medicaid contracts. UnitedHealth has tried to avoid the Obamacare exchange business, unlike its’ competitor Anthem (NYSE: ANTM). Currently UnitedHealth policies are only sold on the exchanges in three states; Virginia, New York and Nevada.

UnitedHealth is making a lot of money

Skeptics might be wondering if the games on the exchanges indicate that UnitedHealth is not making money. Strangely enough the opposite is true, ycharts data clearly shows that UNH is making a lot of money.

Pedestrians pass in front of a UnitedHealthcare store in the Queens borough of New York, U.S., on Monday, Jan. 14, 2013. Photographer: Michael Nagle/Bloomberg via Getty Images

Data that shows UnitedHealth is making a lot of money includes:

  • A net income that increased by $1.56 billion between March 2016 and March 2017. UNH reported a net income of $6.011 billion in first quarter 2016 and $7.578 a year later.

 

  • Revenues that increased by $19.16 billion during the same period. UnitedHealth reported $165.88 billion in revenues in March 2016; and $189.04 billion a year later.

 

  • A free cash flow of $5.949 billion on March 31, 2017.

 

  • Assets of $139.16 billion on March 31, 2017.

 

  • Cash and short term investments of $19.35 billion on March 31, 2017.

 

  • $13.93 billion in in cash from operations on March 31, 2017.

  • A market capitalization of $181.25 billion on July 5, 3017.

 

  • An enterprise value of $196.51 billion on July 5, 2017.

 

These numbers indicate that UnitedHealth Group is a great value investment but there are some serious and ethical problems with this company. Those problems give it a very uncertain future, and make UNH a very questionable investment.

Warren Buffett has a Serious Warning for UnitedHealth

The problems focus on a serious crisis that might affect America’s future and they have been best described by Warren Buffett. Buffett is concerned because U.S. spending on healthcare now equals 17% of the Gross Domestic Product (GDP). He noted that the US only spent 5% of its GDP in 1960.

To fix this Buffett recommended a dramatic cure in the form of a government administered single-payer health insurance system. He even told PBS Newshour’s Judy Woodruff that Single Payer is the best solution in a recent interview.

“So corporate taxes are way less of a factor in American competiveness than medical costs,” Buffett told Woodruff.

“You can’t have that five go to 17 and move on to 20 and 22 or 24% because there are only 100 cents in the dollar,” Buffett added. “Healthcare is gobbling up well over $3 trillion a year. It’s just about the same as the federal budget.”

Cost will Force America to Adopt Single Payer

Buffett is right here, most countries spend around 9.82% of their GDP on healthcare according to the World Bank. There is also evidence that single payer can help contain costs in the World Bank’s data.

Australia; which has a single payer system admired by President Donald J. Trump (R-New York), spends around 11.2% of its GDP on healthcare. Canada spends around 10.4% of its gross domestic product on single payer. Chile, another single payer country, spends 7.8%. France; considered the world’s healthiest nation spends 11.5%. Germany; where single-payer originated, spends 11.3%, Japan spends 10.2% and the United Kingdom spends around 9.1% of its GDP on the National Health Service.

Customers at a Medicare office in Brisbane, Monday, May 12, 2008. Opposition health spokesman Joe Hockey has warned that moves to change the medicare surcharge threshold will be catastrophic for hospitals. The changes are expected to be announced at the federal Labor budget tomorrow. (AAP Image/Dave Hunt) NO ARCHIVING

Cost alone will force the United States to adopt single-payer healthcare whether Americans want it or not. Movement toward single-payer is well advanced with political figures as diverse as Trump, U.S. Senator Liz Warren (D-Massachusetts) and Nevada Governor Brian Sandoval (R) expressing support for or interest in the concept.

Does Single-Payer Legislation Threaten UnitedHealth or Make it more Valuable?

Health insurance investors need to pay close attention to the single-payer issue because legislation for it is advancing on a number of fronts. Single payer legislation is close to success in a number of states including:

  • Nevada – AB (Assembly Bill) 374; which would have allowed all residents to enroll in the state’s Medicaid program through the Obamacare exchange, passed in both houses of the state legislature with bipartisan support. This legislation would have made a popular Democratic strategy for achieving single-payer; adding a “public option” to Obamacare exchanges a reality. That would create unfair competition for private insurers because Medicaid has far greater powers to control costs than health-insurance companies. Sandoval vetoed the measure after admitting he sympathized with its goals.

 

  • California – Senate Bill (SB) 562; which would outlaw all private health insurance and create a statewide single-payer system, passed the state Senate on June 1. Since then State Assembly Speaker Anthony Rendon (D-Lakewood) has stirred up a major political battle by blocking the measure. Rendon is receiving death threats on social media for his actions, The San Jose Mercury News reported.

  • Colorado – Amendment 69; a ballot measure that would have created a statewide single payer health-insurance system made it to the November 8 ballot and lost. Amendment 69 supporters are now organizing a grassroots political effort to achieve their goal.

 

  • New York State – Assembly Bill 5062 or Senate Bill 3525; a single payer proposal called the New York Health Act has been passed by the state assembly three times, but keeps getting held up in the State Senate.

 

Single Payer also has strong support in Washington. President Trump is a fan of the concept; 112 members of the House are supporting “Medicare for All” legislation, and one of the most influential Democratic Senators Liz Warren (D-Massachusetts) wants her party to make a nationwide push for single payer.

Single Payer is a Nightmare and an Opportunity for UnitedHealth

This effort poses a dilemma for UnitedHealth because single-payer would destroy much of its business. There would be little market for individual policies; because most people would go on single-payer, as most senior citizens use Medicare.

A real nightmare for UnitedHealth would be if Congress repealed the Obamacare requirement for employers to offer health insurance at the same time it implemented single payer. Most employers would simply drop health-insurance coverage and tell their people to sign up for the single payer. Since employer health insurance policies make up of most of UnitedHealth’s business you can see where this is going.

UnitedHealth Group Inc. signage stands in front of company headquarters in Minnetonka, Minnesota, U.S., on Wednesday, March 9, 2016. UnitedHealth Group Inc.’s OptumRx unit struck an agreement to ease customers’ access to drugs through Walgreens Boots Alliance Inc.’s drugstores, a move to help the business compete with rival pharmacy benefit managers. Photographer: Mike Bradley/Bloomberg via Getty Images

There might be some opportunities for UnitedHealth under single-payer. It might sell supplemental policies similar to the ones Medicare recipients can buy. Another opportunity would be if some states simply bought private-health insurance policies for citizens under single-payer, that’s how Medicaid already works in a number of states.

Single-payer might also reduce costs for UnitedHealth because it would be able to drop all the really expensive patients. That includes persons with preexisting conditions and those over 50. They would simply go on single-payer which might reduce costs for everybody else.

Lack of Single Payer might be a Bigger Nightmare for UnitedHealth

Strangely enough not getting single-payer is also a potential nightmare for UnitedHealth; because if Buffett’s predications about costs come true, its business might become unsustainable at some point. Health insurers might be forced to drop all but the youngest and healthiest policyholders; or raise deductibles so high that their coverage becomes useless for most people, if costs spiral out of control.

An even greater nightmare would be a situation where premiums are so high most people and employers simply could not afford health insurance. That situation would cut into UnitedHealth’s profits and fuel public support for radical single-payer laws like California’s SB 562.

Investors had better pay close attention because the health-insurance market is about to change beyond recognition. When that occurs, insurers like UnitedHealth Group might no longer be value investments.