The Business Of

Healthcare | UnitedHealth | What Do They Do With Their Profits?

Morning All!

Yesterday we put together UnitedHealth’s costs with their revenues. And we’ve covered a fair amount this week. So, why not have a little recap…

• Premium Revenues - UnitedHealth make ~79% of their revenues through premiums. And people upgrading their Medicare plans to private plans has been driving a lot of United’s growth!

• Premium Costs - in the US, it costs on average of ~$18k to have a baby and ~$40k to have hip replacement surgery! But it’s health insurers like United who pick up most of these bills, not patients.

• The MCR Cap - to prevent health insurers taking so much in premiums and not spending much on healthcare. The Medical Cost Ratio basically puts a cap on margins!

And speaking of margins. It’s a Thursday morning. Which means it’s time to take a look at our famous TBO EBIT Margin ranking! Below, we can see our ranking updated to include UnitedHealth. And again, we’re near the back of the pack!

But despite the super low EBIT margin. We actually ended yesterday’s newsletter with an interesting question about United’s gross margin. If the MCR means that insurers need to spend at least 80% of their premiums on medical costs… how can UnitedHealth have a gross margin of more than 20%?! Because COGS (medical costs) should be 80% or more, right?

Well, yes that is absolutely right. And United’s health insurance business does have a gross margin of less than 20%. But it’s their other businesses that give their gross margin a boost to 25%! Today, we’re going to dive into these other businesses. And let’s kick off with our usual waterfall chart!

A Third Acquisition Thursday In A Row!

Okay, so over the last 2 weeks, we’ve seen that AbbVie and CVS Health both spend a lot of their cash on acquisitions. AbbVie (~44%) and CVS Health (~51%). So, a decent guess would be that UnitedHealth also spend quite a bit on acquisitions. And that’s exactly what we see below!

UnitedHealth has made $173bn in cash from operations since 2010. And the company spent a whopping $81bn (~47%) of this cash on acquisitions!

So, for the third week running on a Thursday, let’s focus on acquisitions again! And figure out what UnitedHealth have been acquiring with all their billions…

Constant Diversification

Okay, so let’s rewind a few years to 2010. And what did UnitedHealth look like back then? Well, as the chart below shows, UnitedHealth was pretty much all health insurance! 94% of revenues and 86% of EBIT came from this business line.

But now let’s fast forward from there to 2015. And we can see a slightly different picture in the chart below. Health insurance still makes up the majority (84%) of the company’s revenues. But a less substantial 61% of EBIT. So, what happened between 2010 and 2015?

Well, in 2014, UnitedHealth went shopping. Shopping for PBMs (pharmacy benefit managers)! Now, it wasn’t like UnitedHealth were starting from scratch. The company already had a PBM business called Optum Rx which they founded in 2010. But in 2014, UnitedHealth decided to strengthen their presence in this market. And bought the 4th largest PBM in the US – Catamaran - for $13 billion. We’ll come back to this in just a moment!

But let’s press on. And fast forward again to last year, 2022. And again, if we look at the charts below, UnitedHealth underwent another shift in their business lines. Because now, whilst health insurance was still 79% of revenues, it was only 51% of EBIT! In 12 years, we’ve gone from 86% to 51%!

So, what happened between 2015 and 2022? Well, during this period, UnitedHealth bought hundreds of smaller companies. And not in their health insurance division. But in Optum Health - their physician business. And Optum Insights - their data analytics business. We haven’t really spoken about Optum Health at all but this division is actually the largest the largest employer of doctors in America! Which just shows how big UnitedHealth is as a company. And we’ll go through the significance of all of this in the final section!

Oh and by the way, it’s the Optum Insights division that’s boosting UnitedHealth’s overall margins! With the data analytics segment boasting EBIT margins of ~25%!

But let’s move on. Because we’ve had a brief look at the major acquisitions UnitedHealth’s made over the last decade or so. And how that’s changed their business model. Now, let’s close by looking at the real ‘why’ behind these acquisitions. Because all these acquisitions in related divisions looks awfully similar to the vertical integration we saw CVS Health doing last week…

The Apple Of Healthcare?

… and if you were thinking this – you’re spot on! Because UnitedHealth are doing something very, very similar to CVS Health. These US giants are all trying to become a one-stop shop for US citizens in their healthcare needs! What do I mean by this?

Well, let’s look at UnitedHealth. The company has a health insurance business, UnitedHealthcare. A PBM business, Optum Rx. A physician care business, Optum Health. And a data analytics firm, Optum Insights. And as the graphic below shows, a US citizen who’s insured by United Healthcare. Can then then use Optum’s various business lines in their healthcare journey! Basically, without having to leave the United Health ecosystem!

It’s a little bit like Apple! iPhones, Macs, AirPods, AppleMusic, Apple TV, Apple Pay… Apple Bank! Apple do an incredible job keeping people in their ecosystem. And so this is why United bought Catamaran (the PBM) and all those small companies. To bolster their Optum Health and Optum Insights businesses… and their overall ecosystem! UnitedHealth are trying to become the Apple of Healthcare!

Now, UnitedHealth would say that they’re lowering costs and pressures on US hospitals. Because if more individuals are visiting their Optum Health doctor centers. Or more doctors are visiting individuals’ homes. It clears up hospitals beds and reduces waiting times! This YouTube video is a great resource explaining the advantages of vertical integration for US citizens and United.

However, a lot of people aren’t buying this! With studies claiming that vertical integration is actually leading to higher costs and worse health outcomes. The DoJ (Department of Justice) also got involved recently to try and block a United merger. But despite the negative press some of United’s moves have received over the years. I know one group who are certainly happy with the decision to expand the ecosystem and diversify away from just health insurance – shareholders! UnitedHealth’s stock has increased ~15x since the transformation started in ~2010!

13th Jul 2023

Nigel Jacob CFA