UnitedHealth: Increasingly Robust


By Joseph Weber With medical costs soaring, employees and employers grousing about double-digit insurance hikes, and lingering unemployment cutting down on membership growth, the folks at UnitedHealth Group (UNH) should be feeling poorly (see BW, 10/20/03, "Get Used to the Pain"). But the nation's biggest provider of health-care services -- a behemoth whose revenues are likely to top $28.6 billion this year -- seems to be in fine form. It's managing to pass on most of the higher costs via ever-heftier premiums, while simultaneously expanding the parts of the business that are helped by tough times. "They're just having another banner year," says J.P. Morgan Securities senior analyst Scott J. Fidel.

The Minnesota-based outfit is looking beyond short-run prospects to expand into more health-care niches. The acquisition spree that turned what was a modest-size regional HMO little more than a decade ago into the sprawling national titan of today continues, as UnitedHealth closes in on acquiring Golden Rule, a $1 billion-a-year privately held Indianapolis company. Golden Rule, which UnitedHealth is expected to snap up by January, pitches health insurance -- largely tailored for medical-savings accounts -- to individuals, an area that UnitedHealth hasn't focused on as much as it has employer-based coverage. UnitedHealth recently acknowledged it has been in talks with Golden Rule, whose business does well when unemployment rises and the need for individual coverage increases.

GRIN AND BEAR IT. For investors, UnitedHealth isn't risk-free. Its performance has helped drive the stock by about $10 a share, to about $52, in the last year alone. "The stock isn't cheap," says Nicholas Xie, an analyst with PNC Advisors, part of PNC Financial Group. Consequently, he says, any unpleasant surprises could quickly register in its price.

Yet analysts say it's hard to see what might go wrong. Why has UnitedHealth thrived when others are hurting? Employers, at the core of the outfit's business, have been able to do little to contain health-care costs -- aside from transfer more of the burden to individuals. UnitedHealth can simply pass on most of the hikes and still command a healthy income off the top. What's more, with health insurers no longer locked into the fevered rate-cutting competition that marked the industry only a few years ago, employers have few alternatives but to accept double-digit premium increases. For insurers, hikes of as much as 18% have been common in the last few years.

That's expected to change in the coming year -- though not dramatically enough to roil UnitedHealth. Analysts say fed-up employers are likely to tolerate hikes from insurers of no more than 12% in 2004. Still, with few other industries able to command such increases, some health-care insurers are likely to see their businesses continuing to grow.

And since it has been taking market share from rivals, UnitedHealth will likely keep surging -- albeit at a slower rate. Analyst Fidel expects UnitedHealth's net-income growth will drop to about 19% next year, to $2.089 billion, after soaring 30% in 2003. He believes revenue will rise about 8%, to $31.3 billion, in 2004, after a 14% gain in 2003. Says Fidel: "The prospects are very good."

SWELLING NUMBERS. Investors have little reason not to believe that UnitedHealth will continue to outperform its rivals. In recent years, it has sunk millions of dollars into modernizing its technology and developing Web-based systems that make it far easier for employers and UnitedHealth alike to handle employee needs. As a result, it's widely regarded as the most user-friendly health-care insurer in the market.

What's more, it has been building up parts of its business that are relatively risk-free -- at least to UnitedHealth. For instance, it now serves more than 300 major employers who self-insure, meaning UnitedHealth collects healthy administrative fees while the employers bear the risk of rising medical costs. At a time when industry gains will be flat or up only slightly, such programs are helping UnitedHealth increase the number of people it serves in employer programs to well over 18 million.

From an investing perspective, it's difficult to foresee developments that might derail UnitedHealth -- certainly over the next year or so. Barring major election-year health-reform initiatives or dramatic changes in the way employers provide health-care coverage, both of which are unlikely, UnitedHealth's outlook remains robust -- no matter how much health-care costs continue to take even bigger bites out of consumers' wallets. Weber is bureau chief for BusinessWeek in Chicago


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