Health insurer UnitedHealth Group (UNH -1.03%) has announced that beginning Sept. 1 , approximately 4 million UnitedHealthcare commercial members will have free access to the Peloton Interactive (PTON 2.62%) App for either 12 months via the Peloton Digital Membership or for four months through the Peloton All-Access Membership. The offer applies to both new and existing Peloton members.
This is the textbook definition of a winning partnership -- UnitedHealth Group, Peloton, and their customers all benefit in some aspect from the announcement. Here's how each group wins.
Image source: Peloton.
The move will lower UnitedHealth Group's long-term health insurance claims
While it's unclear how many of UnitedHealth Group's 4 million commercial members will ultimately enroll with Peloton to obtain access to what the insurer calls "best-in-class, multidiscipline fitness classes," a 5% enrollment rate would work out to roughly 200,000 users.
Although what Peloton calls its "net monthly connected fitness churn rate" was at an all-time low of 0.31% in Q3 2021 (its most recent), we'll assume for the sake of conservatism that this rate after one year will reach 50%, since most new members will be taking advantage of an offer that costs nothing out of pocket. That would drop the UnitedHealth-related membership number down to 100,000 (for the sake of simplicity, we'll assume no further churn).
The health benefits of regular exercise over the long term are tremendous. The financial benefits of exercise over the long term are equally striking: People who exercise earlier in life or during middle age save anywhere from $824 to $1,874 on healthcare costs each year, according to the team behind Eat This, Not That.
This means that overall, people who begin exercising by middle age are less likely to go on medications or undergo expensive procedures to address chronic medical conditions.
Avoiding medications and costly procedures saves policyholders money because, depending on their deductible and out-of-pocket maximum, they may have to pay thousands of dollars before UnitedHealth Group covers costs beyond the policyholder's deductible and out-of-pocket maximum.
And when policyholders stay healthy, avoiding serious medical treatment to address significant conditions, UnitedHealth Group saves money because those policyholders don't meet their deductibles -- meaning UnitedHealth Group will not be responsible for any minimal medical treatment that the policyholder receives in a given benefit year.
Savings of $1,000 per member for UnitedHealth Group, for example, would work out to $100 million annually in long-term savings, provided the aforementioned 100,000 people continue to live active lifestyles.
While that's not a mind-boggling number given UnitedHealth Group's market capitalization of $390 billion, this is also just the first step that the health plan provider has taken with Peloton to help both companies achieve their "joint goal of making fitness and overall wellness more attainable and accessible." As the benefits of the partnership become more apparent, it is likely that UnitedHealth Group will enter into similar agreements to assist more members in improving their health and quality of life.
Peloton gains a significant amount of long-term customers
Peloton's total membership base was more than 5.4 million as of March 31. The news that a portion of UnitedHealth Group's 4-million-member commercial base will be using the Peloton app, even if the engagement is temporary for some, is a huge positive.
Conservatively assuming that none of the aforementioned 100,000-strong base of Peloton users stemming from the UnitedHealth Group partnership ever purchase a stationary bike or treadmill from Peloton, but do continue using the Peloton app, this could lead to an additional $15.6 million in annual revenue ($12.99/month Peloton Digital Membership times the 100,000-person base). It's entirely possible that this figure could be several times higher if some members opt for the more expensive memberships like Peloton Bike or Peloton Bike+ ($49 and $64/month, respectively).
For a company that is expected to generate $4 billion in revenue for the current fiscal year, tens to upwards of hundreds of millions of dollars in additional annual revenue is a promising development.
Engaged customers benefit from improved health outcomes
A recent study by the American Heart Association found that just 150 to 300 minutes of moderate-intensity physical activity on a weekly basis reduces the risk of developing type 2 diabetes mellitus by 25% to 35% and coronary heart disease by 14%.
Peloton fills a tremendous unmet need in getting people off their couches with interactive and engaging fitness instruction to meet the physical activity guidelines recommended by the U.S. Department of Health and Human Services, which will benefit both customers and health insurers such as UnitedHealth Group through reduced healthcare costs. Customers will also benefit from a higher quality of life by avoiding the pain and suffering that comes with chronic diseases that can be brought on by a sedentary lifestyle.
What's better than a win for everyone involved?
A truly great and sustainable business model is one that is able to address a need or want in society and turn a profit, which is what UnitedHealth Group has been doing for decades, and 2021 looks to be no different -- management is forecasting between $18.30 and $18.80 in adjusted earnings per share (EPS) for the year. The upper end of that EPS guidance would represent a solid 11.4% year-over-year growth rate over the $16.68 reported in 2020.
Peloton is on the cusp of being profitable on an annual basis, with analysts anticipating that 119% and 32% revenue growth, respectively, in 2021 and 2022 will help the company edge out the first full-year profit in its history either this year or next. This deal could give the company the push it needs in the right direction.
It isn't every day that a partnership so clearly benefits all parties involved, but UnitedHealth Group and Peloton have been able to deliver real value to their customers, which strengthens the two company's operating fundamentals going forward.
