The Business Of
Healthcare | UnitedHealth | How Do They Make Money?
Morning All!
So, yesterday we started the third and final part of The Business Of Healthcare. And our focus this week is on UnitedHealth - the largest health insurer in the US! We saw yesterday that health insurers help individuals by providing protection. Instead of having to pay massive medical bills when a health issue arises. Individuals can make monthly payments (premiums) to health insurers and then it’s the health insurer who’ll cover MOST - not all - of the medical costs!
We’ll focus on these costs tomorrow. But for today, let’s talk about revenues. And as we can see from the chart below, these premium payments make up the majority (79%) of UnitedHealth’s revenues!
And in fact, for the health insurance part of the business, premiums are basically the only revenue stream! The ‘Products’ and ‘Services’ revenues come from United’s other business segments like their PBM division. And we’ll touch on these on Thursday!
But for now, let’s dive into premiums and analyse the main drivers of these revenues. Just a heads up - there’s a lot of (valuable, I hope!) content to get through so it’s a slightly longer newsletter today!
Mature Markets = Slow Growth!
Okay, so to kick us off - who’s paying UnitedHealth these $257 billion in premiums?! Well, to answer that, let’s look at the chart below. And what this chart shows is that there are 3 main customer ‘types’ who pay premiums.
(1) Employers, (2) Individuals, and (3) the US government. UnitedHealth reports the Employer and Individual customer segments together so we’ll look at those two together now. And look at the US government after!
Okay, so with employer insurance, there’s actually 2 types of plans: risk-based and fee-based plans. With risk-based plans, employers will pay health insurers like UnitedHealth an average of ~$8k per year per employee (~$650/month). And it’s up to the health insurer to pay the medical costs for that company’s employees. Like if they need drug medication or a hospital stay. With fee-based plans, employers will pay health insurers a much lower amount per employee. And that’s because the health insurer will just do a few admin bits. But its the employer who’s responsible for paying medical costs! We’ll return to this in a second!
So, as we can see above, 179m Americans are fortunate to have their employer offer private insurance for them and their family! But what about the companies that don’t offer this benefit? Or individuals who work for themselves? Well, unfortunately these individuals have to pay those monthly premiums themselves…
Okay, so the next question we’ll look at is - how have these revenues been growing over the last decade? Well, back in 2010, UnitedHealth brought in ~$43bn worth of premiums from companies and individuals. And by 2022, this had grown to $64bn. Now, whilst these are massive numbers - the growth rate really isn’t that great! It’s only 3% CAGR. So, what’s going on here?!
Well, as always - let’s look at 2 things - volumes and pricing! Are UnitedHealth struggling to get more people/companies on their health plans? Or are they struggling to raise the prices of their premiums? Well, the chart below shows us that it’s a bit of both! The number of people either self-insuring or being insured through their employer has hardly grown since 2010! With 25 million in 2010, becoming only 27 million in 2022. And the red line shows that the average annual cost of premiums was $2,383 in 2022. Which is only a growth of ~3% CAGR since 2010’s $1,715 level.
Now, what’s the reason behind this sluggish growth? And doesn’t that $2,383 figure seem low, given we said earlier that employers pay premiums of ~$8k on average per employee?! Well, let’s tackle question 1 first. And one of the main reasons for the slow growth here is maturity. Private healthcare is a very mature market! The number of companies and individuals who want private healthcare next year isn’t going to be very different from the number this year! And so those 27 million people UnitedHealth cover in this segment is unlikely to rise by too much in the coming years!
Okay now, let’s look at the the $2,383 figure. Because yes, if you’re thinking this looks low - you’re right! But what I haven’t told you yet, is that out of the 27 million people United cover in the Employer & Individual segment. 19m of them are covered by a fee-based plan! Which as we said earlier, has lower premiums than the risk-based plan. Because United take very little risk. They just do boring admin work!
Okay, so quite a bit of info there. Let’s quickly sum up the key takeaways from the Employer & Individual section…
Number of people covered: 27 million.
Average annual premium cost: $2,383.
Revenue: 27 million x $2,383 = $64 billion!
Right, let’s move on!
Less Mature Market = Stronger Growth!
Okay, so we’ve seen how UnitedHealth’s Employer and Individual segment works. But what about if you’re retired? Or if you really can’t afford private insurance? Well, as we saw yesterday, that’s what Medicare and Medicaid help with! The US government subsidises the cost of healthcare for the elderly and less wealthy.
But where it gets interesting for UnitedHealth and private insurers is that a lot of the individuals covered by Medicare and Medicaid want more! They don’t want just the basic healthcare plan. And in fact, ~50% of individuals on these plans actually pay more to upgrade to Medicare Advantage and Medicaid Supplement. Which are both plans provided by private insurers like UnitedHealth! And this figure is expected to continue rising like it has done over the last decade!
So, how does this work? Well, the individuals covered by Medicare and Medicaid who want to upgrade will pay higher premiums to the US government. So they can access these better plans. And the US government will pay UnitedHealth (and other private insurers) to provide medical services to those individuals! So, again, UnitedHealth make their revenue through premiums. And again, let’s look at the drivers…
And this is so different to what we saw earlier! The number of people coming to UnitedHealth through the Medicare/Medicaid programs has more than doubled over the last 12 years! From ~8m in 2010 to ~20m in 2022! And this is because this private insurance market wasn’t that mature! We saw in the chart earlier than only ~20% of Medicare individuals were also enrolled in private healthcare back in 2010. And as this figure increased, so did the number of UnitedHealth members!
The other interesting part here is pricing - as we can see from the red line, UnitedHealth haven’t been going easy on the US government! They’ve been charging them higher and higher premiums year on year… with the average annual premium now at $9,032 per individual! This is considerably higher than the $2,383 we saw being charged per Employer & Individual member. Now, the main reason for this is because the ~20m people UnitedHealth cover in this segment are all on risk-based plans, not fee-based plans. And we said earlier, risk-based plans are higher revenue. But it’s also because Medicare members are elderly…
… and elderly citizens are more expensive to cover! As people get older, they need to go to the hospital more often for treatment. And as we’ll cover tomorrow - this increases costs for UnitedHealth! And so private insurers will ask the government to pay them higher premiums to cover these elderly individuals. As the screenshot above shows, this isn’t just a US thing by the way - it’s the same for the NHS!
But anyway, the important takeaways for us from the Medicare/Medicaid upgrade section are…
Number of people covered: 20 million.
Average annual premium cost: $9,032.
Revenue: 20 million x $9,032 = ~$180 billion!
Growth: Impressive ~12% CAGR from $46bn in 2010.
Alrighty, last part!
Slightly Ahead Of CVS, Slightly Behind AbbVie
Okay, so let’s wrap up. We’ve seen that whilst UnitedHealth’s mature market - the Employer and Individual segment - has seen sluggish growth of ~3% CAGR. The less mature Medicare/Medicaid upgrade market has seen very strong growth of ~12% CAGR. And UnitedHealth actually make ~3x more revenue from this segment (~$180bn) than they do from their Employer and Individual segment ($64bn)!
Now, let’s put these 2 segments together. And the chart below paints a pretty beautiful picture over the last 12 years - look at all that green!
UnitedHealth’s revenues have grown from $94bn in 2010 to $324bn in 2022. At a very healthy 10.9% CAGR over this period. Now of course, some of this revenue growth will come from UnitedHealth’s other revenue streams, e.g. their PBM segment. And on Thursday, we’ll get onto the key acquisitions UnitedHealth have made over the last decade.
However, fair warning - it’s not all rosy being a health insurer. Because one of the main ‘drawbacks’ of this industry is the scrutiny on costs/margins. Which is exactly what we’ll be diving into tomorrow! For any keen beans out there - have a read up of medical cost ratios!
11th Jul 2023
And that’s a wrap! Well, done if you got through all of that! Tomorrow, we’ll crack on with looking at UnitedHealth’s margins. To see whether the health giant has been able to convert their revenues into profits!
Have a fabulous day!
The Business Of Team