10-K Tuesdays: UnitedHealth Group

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We are taking a look at UnitedHealth Group ($UNH) this week, a name that popped up in Avondale’s proprietary quantitative value screen. The screen looks at historical financial data to potentially identify high quality companies trading at low valuations. The screen is an important part of Avondale’s investment process, but this post should not be taken as an investment recommendation.

Fundamental Data:

Price: $74.35
Market Cap: $74.85 B

Income Statement

Revenue: $ 110 B
Premiums: $100 B
Medical cost: $80 B
Operating cost: $17 B
Operating Income: $9.3 B
D&A: $1.3 B

Balance Sheet

Cash & Investments: $28 B
Medical Costs Payable: $11 B
Debt: $16.7 B

Statement of Cash Flows

OCF: $7.1 B

Notes From 10-K (Filed 2-6-13)

Two Platforms: United Healthcare and Optum

Four reporting segments: UnitedHealthcare, OptumHealth, OptumInsight, OptumRx

UnitedHealth Revenue and Earnings

United Healthcare (Four insurance segments): (93% of revs, 84% of op inc)

Insurance Revenue by Segment:

UnitedHealth Revenue by Segment

Lives covered by segment

United Health Lives Covered

UnitedHealthcare arranges for discounted access to care through networks that include a total of nearly 780,000 physicians and other health care professionals and approximately 5,900 hospitals and other facilities across the United States.

UnitedHealthcare Employer & Individual:

serves employers ranging from sole proprietorships to large, multi-site and national employers, as well as students and other individuals

As of December 31, 2012, UnitedHealthcare Employer & Individual National Accounts served 395 large employer groups under these arrangements, including 147 of the Fortune 500 companies.

During 2012, nearly 42,000 employer-sponsored benefit plans, including more than 200 employers in the large group self-funded market, purchased an HRA or HSA product.

UnitedHealthcare Military & Veterans Services will be the Managed Care Support contractor serving more than 2.7 million TRICARE beneficiaries in 21 states

UnitedHealthcare Medicare & Retirement:

delivers health and well-being benefits for Medicare beneficiaries and retirees.

Premium revenues from the Centers for Medicare & Medicaid Services (CMS) represented 29% of UnitedHealth Group’s total consolidated revenues for the year ended December 31, 2012, most of which were generated by UnitedHealthcare Medicare & Retirement under a number of contracts.

Under the Medicare Advantage program, UnitedHealthcare Medicare & Retirement provides health insurance coverage in exchange for a fixed monthly premium per member from CMS.

Retirement had approximately 2.6 million members enrolled in its Medicare Advantage products as of December 31, 2012.

As of December 31, 2012, UnitedHealthcare had enrolled 6.8 million members in the Medicare Part D program, including 4.2 million members in the stand-alone Part D plans and 2.6 million members in its Medicare Advantage plans incorporating Part D coverage.

UnitedHealthcare Medicare & Retirement is currently serving approximately 4 million seniors through various Medicare Supplement products in association with AARP. These products cover varying levels of coinsurance and deductible gaps that seniors are exposed to in the traditional Medicare program.

UnitedHealthcare Community & State:

manages health care benefit programs on behalf of state Medicaid and community programs and their participants.

UnitedHealthcare Community & State participates in programs in 25 states and the District of Columbia, serving approximately 3.8 million beneficiaries.

UnitedHealthcare International:

In 2012, UnitedHealthcare International acquired Amil, which provides health and dental benefits to over five million people and also operates 22 acute hospitals, as well as specialty clinics, primary care, and emergency services across Brazil, principally for the benefit of its members. Amil’s patients are also treated in its contracted provider network of 45,000 physicians and other health care professionals, 3,300 hospitals and 12,000 laboratories and diagnostic imaging centers.

Optum (Three Segments)


OptumHealth is a diversified health and wellness business serving the physical, emotional and financial needs of more than 61 million unique individuals and enabling consumer health management and integrated care delivery through programs offered by employers, payers, government entities and, increasingly, directly through the care delivery system

OptumHealth offers its products on a risk basis, where it assumes responsibility for health care costs in exchange for a fixed monthly premium per individual served, and on an administrative fee basis whereby it manages or administers delivery of the products or services in exchange for a fixed fee per individual served. For its financial services offerings, OptumHealth charges fees and earns investment income on managed funds.

OptumHealth sells its products primarily through its direct sales force, strategic collaborations and external producers in three markets: employers (which includes the sub-markets of large, mid and small employers), payers (which includes the sub-markets of health plans, TPAs, underwriter/stop-loss carriers and individual market intermediaries) and government entities (which includes states, CMS, DoD, Veterans Administration and other federal procurement). As provider reimbursement models evolve, care providers are emerging as a fourth market for the health management, financial services and integrated care delivery businesses.

OptumHealth is organized into three major operating groups: Care Management, Integrated Care Delivery and Consumer Solutions.


OptumInsight is a health care information, technology, operational services and consulting company providing software and information products, advisory consulting services, and business process outsourcing services and support to participants in the health care industry. Hospitals, physicians, commercial health plans, government agencies, life sciences companies and other organizations that comprise the health care system work with OptumInsight to reduce costs, meet compliance mandates, improve clinical performance and adapt to the changing health system landscape.

OptumInsight’s products and services are used by four out of five hospitals, tens of thousands of physician practices and other health care facilities, approximately 300 health plans, nearly 400 global life sciences companies

OptumInsight’s aggregate backlog at December 31, 2012 was $4.6 billion

OptumInsight’s technology products and services solutions are offered through four integrated market groups. These market groups are care providers (e.g., physician practices and hospitals), commercial payers, governments and life sciences.


OptumRx provides a full range of pharmacy benefit management (PBM) services to more than 14 million people nationwide, processing over 350 million adjusted retail, mail and specialty drug prescriptions and managing more than $25 billion in pharmaceutical spending annually.


Affordable Care Act:

1) health plans…with medical loss ratios below certain targets (85% for large employer groups, 80% for small employer groups and 80% for individuals)…are required to rebate…premiums to their customers annually…

2) scheduled to take effect in 2014…an annual insurance industry assessment ($8 billion to be levied on the insurance industry in 2014 increasing to $14.3 billion by 2018 with increasing annual amounts thereafter), which is not deductible for income tax purposes; a transitional reinsurance program ($25 billion over a three-year period), which will be funded by a $5.25 per member per month fee (as currently estimated by HHS.

Back of the Envelope Math

Premiums Analysis:

Insurance Segment revenue per life covered = $2,290

By segment:

Employer & Individual: $1,731 per covered
Community & State: $4,288
International: $259
Medicare & Retirement: $3,938 (including Supplemental Part-D)

Assuming 85% medical loss ratio:

Gross Profit per covered: $344

At (current) 8% operating margin:

$184 operating profit per insured

Affordable Care Act Analysis:

Currently 80% Medical Loss Ratio, if you apply an 85% statutory minimum in implies an extra $4.5 B in expenses.

Extra tax of $5.25 per member per month on 36.5m covered in US: another $2.3 B in after tax expense.

Those two numbers seem huge relative to $9.3 B in current operating income. Not sure if accurate.


$1.4 B in operating income on $29.4 B in revenue, but $22 B is excluded intra-company revenue. Margin on $7 B external revenue is 20%.

US Health Insurance Market:

314 Million people paying $2,290 in average annual premiums per insured implies ~$719 B annual market. 85% statutory loss ratio leaves $107 B Gross Profit dollars.

(Total US healthcare spend was $2.3 T in 2010 according to Aetna)


Market cap of $74.85 B

Assume Optum worth 2x External revenue ~$15 B, health insurance business valued at $60 B or ~$1,300 per insured.

Assume that valuation of $1,300 per insured is 10x normalized EBIT and that United Health doesn’t grow market share or raise premiums. That implies the market is discounting $130 in operating income per insured, or about 5.7% operating margins on $2,290 in revenue per life insured.