You won't hear too many complaints about 2012 from the folks at UnitedHealth Group (NYSE:UNH). So far, the results for the year have looked solid. Third-quarter earnings announced by the company last week continued the positive trend.
What about next year, though? Will UnitedHealth keep the momentum going, or is a slowdown on the way? Here are three reasons why the company's luck might not be as strong in 2013.
1. Risky risk
The poor unemployment situation in the U.S. continues to hurt all of the major insurers. In the second quarter, Aetna (NYSE:AET) reported 2% lower commercial business membership. WellPoint (NYSE:ANTM) experienced a 3% decrease in commercial segment revenue compared with the same quarter in 2011.
Risk-based employer and individual insurance comprised 43% of UnitedHealth's total revenue in the first nine months of 2012. While the company continues to grow this commercial membership, the rate is slowing.
Maybe something could happen to make employers want to hire more. Until then, the outlook for UnitedHealth's employer and individual market doesn't look very positive. Chalk up the risk-based business as quite risky.
2. Good is bad
Medical costs actually declined thus far in 2012. As a result, UnitedHealth's medical care ratio (medical costs divided by premiums received) improved to 80.2% in third quarter. That's good. However, it's also potentially bad.
One of the provisions of Obamacare is that insurers must rebate premiums if their medical care ratios fall below a minimum level. For employer and individual business, that minimum is 80%. Insurers try to set premiums with the minimum in mind, but it can be quite tricky to fine tune these rates precisely.
Should UnitedHealth reduce its medical costs a little more, it could have to return premiums to members. That's good for customers. But for investors, it means the positive trend that has helped UnitedHealth grow earnings in 2012 hits a brick wall.
Good could be bad in 2013.
3. Wild cards
We won't have any problems finding wild cards that could negatively impact UnitedHealth in 2013. One variable involves the company's OptumRx pharmacy benefits manager.
Sales for OptumRx decreased in the third quarter by 9% compared with the prior year. UnitedHealth is in-sourcing all of its pharmacy business to OptumRx, which requires ongoing investments to build up the unit's infrastructure.
The PBM also faces stiff competition in winning external business against rivals that are merging and acquiring. Express Scripts (NASDAQ:ESRX) gained massive economies of scale through its acquisition of Medco earlier in 2012. Catamaran (NASDAQ:CTRX) became the fourth-largest PBM this year when SXC Health and Catalyst combined.
Possible regulatory upheavals, federal and state budget cuts, and the potential for losing major contracts add to the list. 2013 could prove to be a wild ride for health insurers in general.
With UnitedHealth experiencing a strong 2012, am I just throwing around nattering nabobs of negativity? Maybe, but I'm really only agreeing with what the company's management has stated.
CEO Stephen Hemsley expressed caution about earnings in 2013. In particular, he noted "the weak business climate and employment outlook in the U.S." and cited the PBM in-sourcing effort as an operational challenge.
With all of that said, I still view UnitedHealth as the strongest managed-care organization compared to its peers. My opinion is that the stock would be a good addition to an investment portfolio over the long run. 2013, though, just might be less lucky than this year.
Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Catamaran, Express Scripts, and WellPoint. Motley Fool newsletter services recommend Catamaran, 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.
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