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3 Predictions From the Biggest Health Care Giant

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Could UnitedHealth Group (NYSE: UNH  ) have psychic powers?  Probably not. But when the company makes predictions about what might happen with health care or with the U.S. economy, it pays to listen. After all, UnitedHealth reigns as the largest health care organization on this side of the planet.

This week, the management team for the health care giant had a lot to say about the future during the company's 2012 investor conference. Here are three predictions that impact individual investors.

1. Unemployment is here to stay.
UnitedHealth counts more than 250,000 employers across the U.S. as customers. If these organizations were planning to ramp up hiring, odds are that UnitedHealth would benefit and be planning accordingly.

That's not the case. On the contrary, UnitedHealth CFO David Wichmann stated during the Investor Conference that the company expects the U.S. unemployment rate to remain around 8%.UnitedHealth anticipates lower revenue from its Employer and Individual segment as a result of continued high unemployment levels.

This less-than-rosy outlook mirrors that of Express Scripts (NASDAQ: ESRX  ) CEO George Paz. He recently stated that the organization's customers have "unprecedented concerns" about the economic outlook and that employers could hold off on hiring.

2. We're all going to pay a lot more for health care.
I doubt that this prognostication shocks anyone. We have become accustomed to paying more for health care. How bad will it get? UnitedHealth presented some numbers that provide a peek at the future.

The company projects that Americans will spend 46% more on out-of-pocket health care expenses over the next 10 years. That increase comes even though the federal government is spending more.

Part of the added out-of-pocket amount is the direct result of government action. Beginning in 2014, the insurance industry will be assessed a multibillion-dollar tax imposed by Obamacare. Guess who will ultimately pay those billions? We all will. 

Total health care costs are expected to account for 20% of the nation's GDP by 2020 compared to 17% currently. Medicare's trust fund will be emptied by 2024 at the current rate of growth. Medicaid currently makes up 22% of state government expenses and continues to increase at a faster pace than any other budget item.

Employers are scrambling to cope with the increased costs. Many are opting to self-fund health insurance rather than pay for risk-based insurance. UnitedHealth sees this trend continuing with 300,000 to 400,000 insured members shifting to employer self-funded arrangements. 

3. The U.S. probably won't plunge off the fiscal cliff.
In full disclosure, no one from UnitedHealth uttered the words that "the U.S. probably won't plunge off the fiscal cliff." What was said, though, was that the company has not included in its outlook any potential effects from a failure by the president and Congress to extend tax cuts or forestall spending cuts scheduled for Jan. 1.

UnitedHealth executives probably haven't ignored the possibility that a deal could fail. However, I think that they determined that the scenario is unlikely enough that plans shouldn't assume the negative consequences that would be felt if it happens. The company's outlook seems to reflect realistic conditions -- not necessarily optimistic ones but not catastrophic, either.

Prophetic profits
Assuming these predictions are accurate, how can investors profit? High unemployment levels and increased health care costs combine to make managing costs critical to states experiencing swelling Medicaid rolls. A deal to avoid the fiscal cliff doesn't mean that the economy will necessarily improve, but it could help minimize the likelihood of it worsening considerably.

UnitedHealth and competitors such as WellPoint (NYSE: ANTM  ) stand to do well over the long run in helping states control health costs. Similarly, pharmacy benefit managers like Express Scripts and CVS Caremark (NYSE: CVS  ) could be in even greater demand to assist in keeping the lid on drug costs. 

An important tool that these managed care organizations and PBMs will push is increased use of generic drugs. Large generic drug-makers such as Teva Pharmaceuticals (NYSE: TEVA  ) and Mylan (NASDAQ: MYL  ) could reap the rewards of continued growth in generic drug utilization.  

And even if UnitedHealth's predictions are wrong, two of the three aren't bad for any of these companies. More employment helps insurers and PBMs increase commercial revenue. If health care costs grow more slowly, you can bet that managed care, pharmacy benefits management and generic utilization will get part of the credit. 

That leaves only the prospect of the politicians in Washington failing to reach a deal as a real negative. While both political parties have long records of taxing a lot and spending even more, the crystal ball still looks hazy on that front for now.



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