UnitedHealth Group (NYSE:UNH) reported second-quarter 2018 financials that show sales and profit continue to improve despite its decision to cut ties to to Obamacare last year. Here's what you need to know about UnitedHealth's performance last quarter and its guidance for the rest of 2018.

The numbers

Revenue in the second quarter grew 12% year over year to $56.1 billion, and adjusted net income increased 28% year over year to $3.14 per share. Top-line growth decelerated slightly from the 13% growth it delivered in the first quarter of 2018; however, its top line was in line with industry watchers' expectations, and its bottom line was $0.10 better than Wall Street's prediction. For perspective, earnings have beat expectations in each of the past five quarters.

Two sets of hands on a table encircling a paper cut-out of a family.


UnitedHealth's bottom-line performance was supported by an improvement in the company's net margin to 5.2% from 4.6% in Q2 2017. The company's medical care ratio (MCR), a measure of the money it spends on healthcare for its members relative to the premiums it collects, improved by 30 basis points to 81.9% in the quarter, which was within the 81.5% range (plus or minus 0.5%) outlined by the company in April.

The insurer was also a big beneficiary of tax reform. Its income tax rate fell 9.5% to 22% in the quarter.

What's driving its results

UnitedHealth Group makes its money selling health insurance and healthcare solutions via its Optum business segment.

The traditional health insurance business accounts for most of its revenue. In the quarter, health insurance sales were $45.8 billion, up from $40.8 billion in the same quarter of 2017. Price increases, a better revenue mix of business tied to walking away from Obamacare, and the addition of 2.2 million new members drove the increase.

Revenue in UnitedHealth's employer & individual business climbed $742 million to $13.7 billion thanks to the addition of 50,000 members, but the insurer benefited most from improving results at its Medicare and Medicaid businesses.

Its Medicare revenue grew $2.1 billion from one year ago to $18.9 billion as Medicare Advantage memberships increased 10.4%. Meanwhile, Medicaid revenue increased $1.6 billion to $10.7 billion on the addition of 330,000 members.

Across these health insurance businesses, operating margin declined to 5.1% from 5.4% last year because of the return of the health insurance provider fee, which is sometimes referred to as the health insurance tax. As a refresher, this fee was instituted to help pay for Obamacare. It was temporarily suspended in 2017; however, insurers have to pay it in 2018.

Although Optum contributes less to revenue, it's a higher-margin business, and unlike the insurance business, its margin improved in the last year. Optum's solutions, including managing prescriptions for employers and healthcare analytics services, contributed $24.7 billion to revenue last quarter, up 9.1% from Q2 2017, and its 7.5% operating margin was up from 6.7% last year.

Where do we go from here?

Management upped its outlook for 2018. It now anticipates non-GAAP EPS of between $12.50 and $12.75, up from guidance for between $12.40 and $12.65 previously. The previous guidance was up from between $12.30 and $12.60 exiting Q4 2017, so clearly, the company is increasingly confident about its profit growth.

That's good news for investors, because it suggests management will have plenty of financial flexibility to continue returning money to investors.

So far, management has spent $3.15 billion repurchasing 13.8 million shares in 2018, including $500 million to buy back 2.2 million shares last quarter. UnitedHealth announced a new 100-million-share buyback program in June, so future buybacks will occur under that plan. Also, it boosted its dividend payout by 20% to $3.60 per year last quarter, so it spent $866 million on dividends in the second quarter. Currently, its dividend yield is 1.44%.

Improving financials and shareholder-friendly activities offer tailwinds offering support to UnitedHealth's share price this year, but the company's future success will be largely determined by efforts to rein in healthcare costs. The company's cost-cutting efforts include investments to boost price transparency so patients can choose low-cost care and solutions that can allow it to benefit from a shift away from fee-for service healthcare to value-based care.

If those efforts can keep a lid on the company's MCR, then UnitedHealth's profitability should continue improving, making it a stock worth holding in healthcare investors' portfolios.