Market Mad House

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

Crazy Stocks

Can UnitedHealth Group and Big Health Insurance Survive?

Bizarrely, many people are asking can UnitedHealth Group and Big Health Insurance survive because of the political climate. To explain, many politicians are demanding Medicare for All (single-payer government health insurance), while others demand the elimination of private health insurance.

For instance, 46% of the likely Democratic primary voters Emerson Polling interviewed in May 2019 supported leftwing single-payer advocates in the presidential race. In detail, three of the four top candidates were single-payer supporters US Senators Bernie Sanders (I-Vermont), (25%) Kamala Harris (D-California) (10%), and Elizabeth Warren (D-Massachusetts) (10%).

Tellingly, Sanders wants to get rid of the private insurance companies, The Hill observes. Moreover, Business Insider notes Harris wants to restrict private health insurance to supplemental plans for the research. Thus, Harris wants to eliminate most private insurance.

Democrats Want to Abolish Private Health Insurance

Even Big Insurance’s friends; so-called moderate Democrats like U.S. Senator Michael Bennett (D-Colorado), advance plans that could destroy its business.

Bennett advocates something he calls Medicare-X, for instance. Vox reports Medicare-X will allow all Americans to buy a public health insurance option. Buyers of the public option will have access to Medicare prices and healthcare providers. Thus, Bennet; a moderate longshot presidential candidate, is offering a sneaky version of “Medicare for All” with Medicare-X.

I think private insurers will be unable to compete with Medicare-X because it will be far cheaper and easier to get than private plans. Companies like UnitedHealth Group (NYSE: UNH) could lose a lot of money if businesses could buy Medicare-X for employees.

Killing private health insurance is now the mainstream position in the Democratic Party. Democrats already control the US House of Representatives and they could win the Presidency and the Senate next year.

For example, Emerson Polling projects all of the top five Democratic  contenders could beat President Donald J. Trump (R-New York) in the 2020 presidential race. Oddly, Trump himself was an outspoken single-payer advocate in the past and could flip-flop again to ensure reelection. Thus, insurance companies could face a hostile political climate in Washington DC in less than two years.

How Much Money is UnitedHealth Group Making?

UnitedHealth Group could soon face a brutal battle for survival, but it is currently making a lot of money.

Specifically, UnitedHealth Group (NYSE: UNH) reports a gross profit of $11.988 billion, revenues of $60.308 billion, an operating income of $4.832 billion, and a net income of $3.467 billion for the quarter ending 31 March 2019. Impressively, Stockrow estimates UnitedHealth Group had a gross margin of 23.19% on 31 March 2019.

Meanwhile, UnitedHealth is proving Warren Buffett’s view of insurers as cash cows correct. Accordingly, Stockrow reports UnitedHealth had an operating cash flow of $3.234 billion and a free cash flow of $2.672 billion on 31 March 2019.

Consequently, the UnitedHealth Group had $12.407 billion in cash and equivalents and $6.254 billion in short-term investments at the end of March. Thus, UnitedHealth had $18.661 billion in the liquid assets Buffett calls “float.”

How Single Payer Threatens Health Insurance Companies’ Survival

In Buffett’s definition, float is the cash an insurance company generates by collecting premiums. Health insurers generate lots of float; because most Americans must pay premiums to get health care.

Moreover, employers automatically deduct most Americans’ health-insurance premiums from their paychecks. Consequently, health-insurance companies like UnitedHealth Group harvest float from Americans’ salaries.

Single-payer threatens that float because it could give people access to health insurance without a premium. Additionally, employers will have no reason to offer health insurance under a single-payer system.

It will make no sense for an employer to offer health insurance under single-payer. To explain, the employer can reduce expenses by eliminating the cost of administering health and potentially the human relations department.

How Single Payer can Destroy UnitedHealth Group

Plus, organizations can offer employees higher pay because they will not have to pay insurance premiums.

Finally, single-payer will make it easier for companies to use contractors, part-time workers, temps, freelancers, and gig-economy workers. To elaborate, health insurance is one of the biggest incentives for full-time employment in America today.

That incentive will disappear under single payer, freeing many more Americans to abandon traditional eliminate jobs. Employers have a strong incentive to encourage this process because gig-economy workers, freelancers, temps, short-termers, and part-timers are cheaper and more flexible than traditional employees.

All this is a direct threat to UnitedHealth Group because its business model is to generate float from employee health insurance plans. If there are no employee health insurance plans, Unitedhealth has no business.

Can UnitedHealth Survive?

Strangely, the UnitedHealth Group is laying the groundwork for survival under single-payer. Notably, UnitedHealth is a major provider of private Medicare and Medicaid supplement plans.

There are huge markets for such supplement plans. The Henry J. Kaiser Foundation estimates 20.4 million Americans had Medicare Advantage plans in 2018; up from 19 million in 2017, for example.

However, the government often does a poor job of administering such plans. Notably, National Public Radio (NPR) claims over 250,000 people could lose Medicare Advantage coverage because of a payment glitch.

Social Security fails to Pay Medicare Advantage

To explain, the Social Security Administration (SSA) automatically deducts Medicare Advantage payments from many people’s Social Security. Disgustingly, the SSA did not those payments for several months, jeopardizing coverage, NPR claims. 

Such bungling explains why Americans hate private insurance and want a public option. Media coverage of those debacles, and huge health insurance bills breeds a climate of hostility. Accordingly, politicians take advantage of the climate of hatred for big health insurance by climbing on the single payer bandwagon.

Notably, Big Health Insurance makes a great scapegoat for politicians’ and bureaucrats’ failures. For instance, it was the SSA that apparently failed to pay the private insurers. Yet they will bear the blame and probably end up covering the costs of Uncle Sam’s blunder.

Note, NPR does not say whether the SSA’s blunder affected UnitedHealth or its customers. However, I know of at least one Medicare Advantage recipient who received a bill for a UnitedHealth policy Social Security is supposedly paying in May.

Is UnitedHealth Group a Value Investment?

Despite the single-payer threat, I conclude UnitedHealth is a good stock but not a value investment.

Mr. Market fairly priced UnitedHealth at $242.78on 12 June 2019. However, I think the future of health insurance is too uncertain to make UNH a value investment.

On the other hand, UnitedHealth offered a dividend yield of 1.78%, an annualized payout of $4.32, and a payout ratio of 34% on 12 June 2019. Impressively, UnitedHealth’s 25 June Dividend of $1.08 will exceed one dollar for the first time.

UnitedHealth paid a 90₵ dividend on March 19, 2019. Therefore, UnitedHealth’s dividend grew by 18₵. This makes UnitedHealth a great dividend and income stock in the present health insurance market. Unfortunately, I do not think that market will survive the current political climate in the United States.