UnitedHealth Group: Let the Healing Begin
UnitedHealth Group (UNH) is the largest health insurer in the U.S. It has two main business segments, UnitedHealthcare (60% of Revenues), its insurance arm, and Optum (40% of Revenues), the information technology and health services portion of the business.
The UnitedHealthcare segment offers healthcare benefits (insurance) to individuals, small businesses, large businesses, Medicare beneficiaries and retirees. MCOs (managed care organizations) such as UnitedHealthcare and the providers of healthcare services (hospitals, surgeons, GP’s, nurses, physios, etc.) enter into a contract where the healthcare provider agrees to offer services at a reduced price in return for the certainty of business, with MCOs directing their respective members to the contracted providers in their network. In essence, MCOs act as the “middleman” between the customer (payor) and the provider. The concept behind managed care is to increase efficiency and the quality of healthcare provided and do so at lower costs. UnitedHealth has been very successful in growing enrollment in its insurance plans.
Optum has three business segments:
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OptumHealth focuses on care delivery, care management, wellness and consumer engagement. OptumHealth owns Surgical Care Affiliates and MedExpress
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OptumInsight specializes in data and analytics and other health care information technology services and delivers operational services and support to help drive greater efficiencies, i.e., revenue cycle management and risk analytics.
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OptumRx provides pharmacy care services.
There is a fundamental change taking place within the health insurance sector in the U.S. in that care is moving away from fee-for-service to a value-based approach. Value-based care is built around outpatient care, pre-emptive care and quality of service. It requires providers to take a more team-oriented approach to patient care, coordinating care across the continuum and collaborating with a patient’s other care providers to deliver the best outcomes possible. UNH is establishing a value-based care delivery system with a focus on experience, quality, cost of care and better health outcomes for the patients.
We have a 3% weight in UnitedHealth Group in the Global Growth Fund. We expect the company to maintain its 5-7 % top-line growth and low double-digit EPS growth over the medium term. UNH is highly profitable with a return on equity of approximately 25%. Our 18-24 month price target based on 2022 eps of over $21 and the maintaining of its current multiple of 19x is $418, which is 20%+ above current levels.
This Focus Stock is written by Sr. Portfolio Manager, Michael Hakes, CFA.
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