Major health insurer UnitedHealth Group (NYSE:UNH) reported its third-quarter earnings this week. Looking at the results from a mile-high view, they certainly looked good.
Revenue increased 8% compared to 2011. Earnings jumped 28% year-on-year. And the company raised its outlook for the full year. That's good, really good, and great news for investors.
When we peel back the layers, there are some clues from UnitedHealth's third-quarter performance that provide insight into the real state of its business. Let's take a look.
Challenging commercial business
What's UnitedHealth's weakest link? Its commercial risk business.
CEO Stephen Hemsley stated that the business remained flat during the quarter. The U.S. employment situation hangs overhead like a dark cloud. When companies aren't hiring, UnitedHealth isn't enrolling new members.
It could be worse. Rival WellPoint (NYSE:ANTM) saw commercial segment year-on-year revenue decrease 3% in the second quarter. Aetna (NYSE:AET) lost 2% of its commercial medical members in the same quarter.
One bright spot, though, stood out. The company's consumer-directed health products segment grew 24% compared to 2011. That's a good sign in an otherwise not-so-good line of business.
Clue #1: Macro issues are holding back profits on the commercial insurance side of things. Until job growth kicks into gear in the U.S., this could continue to be problematic.
Growing government business
A growing area of business comes courtesy of taxpayers. UnitedHealth's Medicare revenue increased 13% compared to the third quarter last year. Medicaid revenue was up 12%.
UnitedHealth has established a solid Medicare Advantage program, which increased subscribers by 18% year-on-year. Part of that growth came from acquisitions. The company is aggressively marketing these plans in more than 1,600 counties across the U.S.
It also landed a contract with Ohio's first-of-its-kind integrated Medicare-Medicaid Eligibles program. The program kicks off in April 2013.
Clue #2: With the bulk of the company's revenue stemming from its risk insurance business, the key to continued growth is in chasing Medicare and Medicaid dollars. So far, so good.
Overachieving Optum business
The company's Optum business segment, which focuses on technology and services for health-care organizations, overachieved in at least one important way: Earnings jumped 28% compared to last year.
OptumHealth and OptumInsight were the real stars. OptumHealth provides services geared toward population health management, while OptumInsight offers technology services and consulting. Earnings surged 46% and 38% year-on-year, respectively.
The company's pharmacy benefits management business, OptumRx, lagged behind. Revenues were down slightly because of fewer Medicare Part D participants, although earnings remained stable.
Clue #3: There is plenty of money to be made helping other health-care organizations navigate the current complicated environment. However, winning new business against PBM rivals such as Express Scripts (NASDAQ:ESRX) and CVS Caremark (NYSE:CVS) isn't an easy proposition.
What these crucial clues tell us overall is that UnitedHealth is clued in on where things are in health care and how it can achieve success.
Although the commercial business is a laggard, the company is holding its own. UnitedHealth's focus on Medicare and Medicaid is paying off and should continue to do so. And Optum's performance shows that helping other organizations helps the company's own bottom line.
Is UnitedHealth a buy right now? We need to look more into the company's 2013 outlook to determine the answer. Stay tuned for more clues.
Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Express Scripts and WellPoint. Motley Fool newsletter services recommend Express Scripts, UnitedHealth Group, and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.