Sizing Up One of Obamacare's Biggest Players

UnitedHealth Group (UNH 1.61%) leads the health-plan market. But with increasing competition from WellPoint (ELV 1.19%) and an industry that's reinventing itself around the Affordable Care Act, does the Dow component could have a shaky future?

Becoming a behemoth
Acquisitions have been the catalyst for UnitedHealth's growth, increasing membership and the company's geographic reach. Two significant acquisitions took place in the past year: The purchase of XLHealth brought in a relatively small group of plans tailored toward dual eligible Medicare patients, and a deal with Amil created a Brazilian presence and brought in roughly 5 million new beneficiaries.

The company organized its steady growth with a streamlining of segments into two categories: Optum, which includes a pharmacy benefit manager, and UnitedHealthcare. The latter accounted for about 95% of 2012 revenues and breaks down into these sub-segments:

• Employer & Individual: "Traditional" insurance that's given through employer-backed group plans or sought out by individuals. Includes a new Department of Defense contract that will go into effect next month and provide coverage for 2.7 million military beneficiaries.
• Medicare & Retirement: Includes 2.6 million Medicare Advantage members, 4 million in standalone Part D drug programs, and 4 million in Medicare Supplemental, or Medigap, policies co-sponsored by AARP.
• Community & State: Includes Medicaid and Children's Health Insurance Programs in 25 states. Also includes 250,000 dual eligible patients who qualify for both Medicare and Medicaid.
• International: Popped into existence with the Amil acquisition but still represents a small slice of the overall business.

The first two have the most bearing on UnitedHealth's future. The health-insurance exchanges for the ACA will plump up the Employer & Individual segment as the currently uninsured join the market. The company should also benefit from Medicaid expansions. Medicare Advantage could see rate cuts, but UnitedHealth's size means that small losses here and there won't capsize the boat.

Sizing up the competition
WellPoint stands as UnitedHealth's greatest competitor because of its similar number of covered customers. The company's acquisition of Amerigroup last year was a solid play for a Medicaid presence. If WellPoint continues the smart purchases, UnitedHealth could lose its throne.

Here's a side-by-side of metrics for the top five health-plan companies.

Sources: Company 10-Ks and Yahoo Finance
*Medical coverage only. Excludes other categories such as prescriptions and dental.

What's MLR?
Before the ACA, the most important metrics for health-insurance companies were medical loss ratios, or MLR, and EPS. MLR represents the percentage of each premium dollar spent on the medical care of beneficiaries. It's considered a loss, because the money that's not spent on care goes back into the company. In the past, companies were able to trim MLR by omitting unhealthy people or canceling unprofitable plans. But the ACA limits those functions and sets new minimums for MLR.

This topic's complicated enough to warrant its own article. But insurers essentially need to stay above 80% to 85% MLR. If they fall below those levels, customers receive rebates equaling the difference. UnitedHealth and Cigna are just over the lower end of the MLR limits, which could put them at more risk of having to offer rebates.

Foolish final thoughts
It's a strange time out there for health insurers. No one knows exactly how the ACA changes will play out, and that makes it hard to predict growth.

Keep watch as news rolls out on UnitedHealth's involvement in state-based health insurance exchanges and Medicaid expansion programs. A strong presence in those areas could hint at company's future performance.