UnitedHealth Group Inc.UNH

Morningstar Rating

Stock Research and Analysis

by Matthew Coffina

UnitedHealth's (UNH) scale endows it with significant competitive advantages. However, Washington, D.C.'s approach to health-care regulation is changing fast, threatening the foundations of UNH's business. We're willing to bet that managed care organizations Read more

Bulls Say

UnitedHealth benefits from the network effect: Customers want access to its huge network of providers, and providers want business from its 70 million customers.

UnitedHealth collects premiums before it has to pay health-care providers. This float can be used to finance operations, so little external capital is required and returns on invested capital are exceptional.

Economies of scale allow UnitedHealth to spread out fixed investments in technology over more customers, lowering per-customer costs.

Some regulatory reforms would be favorable for UnitedHealth. Efforts to reduce the number of uninsured Americans could mean significant new business. UnitedHealth's Ingenix unit could play a key role in comparative effectiveness research and attempts to pay providers based on health outcomes.

UnitedHealth has relatively few competitors in the national accounts segment, as national scale is required to service employers with offices across the country. UNH's geographic diversification also lowers its exposure to region-specific risks like public health catastrophes and changing state regulation. Read more

Bears Say

Medicare controls about $450 billion of health spending, compared to $115 billion for UNH, allowing it to set much lower provider rates and to better leverage its administrative costs. A new public plan linked to Medicare would have a major competitive advantage over private MCOs.

Poor underwriting could cause premium increases to lag rapidly rising medical costs. Similarly, competitors may be willing to sacrifice margins in an attempt to steal market share.

About 25% of UnitedHealth's revenue comes from Medicare. We expect Medicare Advantage reimbursements to be cut to parity with original Medicare in the near future, which could result in membership attrition back into original Medicare, margin contraction, or both.

Rising unemployment results in lower commercial enrollments, which can result in deleveraging of UnitedHealth's fixed costs.

Among UnitedHealth's competitors are not-for-profits that don't need to worry about earning a profit margin. Read more

Strategy

UnitedHealth has focused on expansion to obtain scale, enabling it to leverage its fixed administrative costs and giving it bargaining power when negotiating with health-care providers. Read more

Management

UnitedHealth has a poor history of corporate stewardship, marked by an option backdating scandal and excessive executive compensation. However, we think governance issues are mostly in the past, and we give the company an average mark. As part of a Read more

Profile

UnitedHealth provides health insurance and related services to more than 70 million Americans. Products include risk-based health insurance, non-risk-based plan management Read more

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