UnitedHealth Group's (NYSE:UNH) decision to stop selling Obamacare plans this year hasn't dented its momentum. The nation's biggest health insurer reported sales of $50 billion in the second quarter, and that's 8% higher than Q2 2016. The company's bottom-line performance was even better. The company's second-quarter adjusted earnings per share clocked in 26% higher than it was last year because it's no longer selling unprofitable Obamacare plans.
Digging into the details
UnitedHealth Group sells health insurance plans, including Medicare plans, and it administers state Medicaid programs through its UnitedHealthcare business. In the second quarter, tight labor markets increased membership in employer-sponsored health insurance, retiring baby boomers increased membership in Medicare plans, and Medicaid expansion drove increases Medicaid membership. Across these health insurance products, UnitedHealthcare's second-quarter revenue totaled $40.8 billion, up from $37.6 billion in Q2 2016.
Overall, membership increased by 2.5 million people during the past year. Enrollment in Medicare plans is up 12%, or 935,000 people, in the past year, and Medicaid enrollment increased by 705,000.
These increases more than offset declining enrollment in the individual market due to its decision to exit most of the Obamacare marketplaces this year. As a reminder, UnitedHealthcare provided health insurance to 1 million people in 2016 via Obamacare plans sold in over 30 states. But after losing hundreds of millions of dollars on these plans, the company walked back its exposure to Obamacare this year.
That decision has been very good for profitability. In the second quarter, operating margin in its health insurance business improved 20 basis points to 5.4%. That may not sound like a big improvement, but since we're talking about billions of dollars in sales, it is. The segment's $2.2 billion in operating earnings in the quarter was $300 million higher than last year.
UnitedHealth also provides data analytics services that reduce healthcare costs for payers, including self-insured businesses, and that business is humming along, too. In the second quarter, Optum revenue increased $2 billion, or 9.9%, from a year ago, and its operating margin was 6.7%, up from 6.1% in Q2 2016. As a result, Optum's operating earnings grew to $1.5 billion from $1.3 billion last year.
Altogether, the improved operating earnings in both segments led to a 26% year-over-year increase in adjusted earnings per share of $2.46 in the quarter.
Uncertainty regarding Republicans' plans to repeal and replace Obamacare is less of a headwind to UnitedHealth Group than its peers that still provide insurance on the marketplaces. Although it could see a decline in Medicaid enrollment over time if expansion funding is repealed, there's a lot of support from republican governors to maintain Medicaid funding for as long as possible. Personally, I think any rollback in expansion will occur slowly, and if I'm correct, then UnitedHealth Group could offset any risk of declining enrollment by targeting new markets that open up under Trumpcare, including opportunities for it to return to the individual market.
Regardless of what happens in Washington, D.C., UnitedHealth Group's results this year suggest its positioned to continue growing. Following its second-quarter numbers, management has increased its earnings outlook for this year to between $9.75 to $9.90, up from its prior guidance of between $9.65 to $9.85.
Overall, I think this company's going to continue growing, and if it does, then it should be able to keep on rewarding investors with buybacks and dividends. Over the past six months, management repurchased $1 billion of the company's stock, and it paid out $1.3 billion in dividends, up 6.7% and 23.2% from last year, respectively. Given the opportunity to profit from healthcare reform, the potential limited negative headwind from a repeal of Medicaid expansion, and a management team that's focused on increasing shareholder value, it's hard to argue against owning UnitedHealth Group in portfolios.
Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.