3 Key Takeaways From UNH's Q2

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Dow component UnitedHealth Group (NYSE: UNH) closed last week up over 6% thanks to a mostly positive second quarter report. Revenues grew 12%, year-over-year, to $30 billion. Health services business Optum saw a 21% revenue growth, and a nearly 70% growth in operating earnings.

But there’s more buried slightly deeper in the quarter’s results. UnitedHealth’s involvement in Obamacare will continue to evolve over the next year. And the company’s fresh off a Department of Defense suspension for its mishandling of the new Tricare contract.   

Here are three key takeaways from the second quarter and what they could mean for the future.  

1. Obamacare evolution  

The Patient Protection and Affordable Care Act, also known as Obamacare, will change the business landscape for insurers. But it will take years before a clear picture of that landscape comes into focus. UnitedHealth’s predicting that an Obamacare baseline will be set by 2016.

The company called out Medicare Advantage in particular as a growth opportunity, albeit one that’s going to see some monetary tightening under Obamacare. But exactly where and how UnitedHealth will participate in each government-backed program is still evolving. The Centers for Medicaid and Medicare Services will review regional market bids throughout the summer. And UnitedHealth will continue pushing and pulling coverage depending on the financial advantages (or disadvantages) of each market.

What did these program memberships look like in the second quarter?

UnitedHealth’s Medicare Advantage segment grew to serve 355,000 more people through the first six months of the year, taking that customer count up to 2.92 million. Medicare Supplement had a smaller growth of 40,000 customers, up to 3.365 million.

The Medicare plans add together to equal 10.225 million customers. The commercial segment has over 30 million customers, so the Medicare segment looks important but not dominant. But revenues tell a different story. The Commercial segment had revenues of about $11.2 billion, while the Medicare and Retirement segment had revenues of $11.1 billion. Medicare is very lucrative for UnitedHealth  

Then there’s the Medicaid segment, which grew by 110,000 in the six months, up to 3.94 million customers and revenues of $4.5 billion. And Medicaid could become a major area of growth depending on how the dust from the Medicaid expansion debate settles.

2. Big business is better

But UnitedHealth benefits from being extremely large, and a failure in one of these government programs wouldn’t cripple the business. That’s why shares barely move when new Obamacare news breaks. Compare and contrast that with Humana (NYSE: HUM), which has become heavily Obamacare reliant.  

Here’s a look at UnitedHealth’s Medicare memberships at the end of last year, compared to Humana and the more moderately sized Aetna (NYSE: AET).

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Market Cap</p> </td> <td> <p>P/E Ratio</p> </td> <td> <p>Covered Lives* (thousands)</p> </td> <td> <p>Medicare Advantage (thousands)</p> </td> <td> <p>Part D Standalone</p> <p>(thousands)</p> </td> </tr> <tr> <td> <p>UNH</p> </td> <td> <p>$73.41 billion</p> </td> <td> <p>13.79</p> </td> <td> <p>40,925</p> </td> <td> <p>2,565</p> </td> <td> <p>4,225</p> </td> </tr> <tr> <td> <p>HUM</p> </td> <td> <p>$14.37 billion</p> </td> <td> <p>10.19</p> </td> <td> <p>9,103</p> </td> <td> <p>2,986</p> </td> <td> <p>1,928</p> </td> </tr> <tr> <td> <p>AET</p> </td> <td> <p>$24.81 billion</p> </td> <td> <p>13.48</p> </td> <td> <p>18,242</p> </td> <td> <p>651</p> </td> <td> <p>479</p> </td> </tr> </tbody> </table>

*Excludes prescription and dental coverage. Market cap and P/E Ratio as of July 24. Membership data as of December 31, 2012. Sources: Yahoo Finance and company 10-Ks.

As you can see, Aetna and UnitedHealth wouldn’t suffer too badly under an unforeseen Medicare membership hit. But Humana would need to start lowering the lifeboats.

3. Tricare flub remains a weakness

UnitedHealthcare grew by 3 million members in the second quarter. And that growth came almost entirely from the initiation of Tricare’s western division. In April, UnitedHealthcare took over the nearly $21 billion contract for Tricare -- an insurance program for military members and veterans.

But UnitedHealth stumbled out of the gate with the contract, and patients faced weeks-long delays for authorizations and referrals. The situation was so dire that the Department of Defense had to impose an emergency suspension that allowed doctors to cut out the insurance middleman when it came time to refer. That suspension started in May and only ended at the beginning of July after UnitedHealth did some major restaffing in the Military and Veterans segment.  

The mishandling of Tricare was a public relations nightmare of a misstep for UnitedHealth. If the company can continue to improve its handling of the program, it will probably only lead to minor long-term damage. But another misstep and future contractors might reconsider whether UnitedHealth’s capable of performing the job.

Foolish final thoughts

UnitedHealth is a Dow component that’s recently upped its dividend. One quarter’s results won’t make or break investor decisions. But Obamacare remains the big game changer for all the insurers, and will take years to set a baseline. The Tricare debacle looks calmer for now, but UnitedHealth needs to continue showing a commitment to improvements.

Obamacare will undoubtedly have far-reaching effects. The Motley Fool’s new free report, “Everything You Need to Know About Obamacare,” lets you know how your health insurance, your taxes, and your portfolio could be impacted. Click here to read more. 

Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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