UnitedHealth Group (NYSE:UNH), one of the nation's largest providers of network-based health care benefits, has embarked upon a companywide initiative to get fit for the future. United already boasts growing revenues, nimble management, and a 1.4% dividend yield. But with its earnings from operations declining quarter after quarter, what is the prognosis?
United's latest earnings report came as no surprise, as earnings from operations were expected to decrease year-over-year due to the effects of the Affordable Care Act. What has come as a surprise is the government's latest about-face, which should positively impact United's earnings outlook going forward.
Over a year ago, the Centers for Medicare and Medicaid (CMS) planned to effectively reduce payment rates to Medicare Advantage plans (MAPs) by up to 8%. But these cuts were thwarted by a bipartisan effort, and in April CMS announced that 2015 payments to MAPs will increase 0.4% overall. United director Rodger A. Lawson acquired 1,000 shares later that month.
MAPs are privately administered health care plans for Medicare-eligible individuals. These plans have historically been reimbursed at a rate over 14% higher than straight Medicare. United is the nation's largest provider of MAPs, serving more than 20% of the market. By avoiding immediate cuts to MAP payment rates, United should benefit from better margins than initially anticipated, which should help stabilize the shift toward the quality-based reimbursement model pioneered by the government's new 5-star-ratings system.
The government is making billions of dollars available in the form of bonus payments to MAPs that rate highly on the new 5-star-ratings system. The system's performance criteria accounts for how providers manage patients' chronic conditions, how often patients get preventive care and vaccines, and patients' level of satisfaction, among many other factors. United has endeavored to achieve and maintain 5-star-plan-ratings, and is approaching this goal by adopting leaner, more efficient network provider networks. So far, United has strategically eliminated 20% of its MAP providers, and is integrating this approach into other lines of business.
United also sees its members as playing an important role in optimizing its network, and is collaborating with the nonprofit Health Care Cost Institute to shed light on the variable prices charged by providers. Today's cost-sharing health care model demands that consumers be able to make informed decisions. Transparency should result in cost savings to both and United and its members.
United's Optum health services business, which uses advances data analytics to improve overall health system performance, has also contributed to maximizing care quality and reducing costs -- thereby helping drive growth. OptumRx, United's pharmacy benefits manager, has been particularly effective, with first quarter revenue growing 44% year-over-year.
United has a large footprint in the Medicare, Medicaid, and commercial insurance markets. It has the military TriCare contract, and continues to expand domestically wherever cost effective opportunities arise. For instance, United is preparing to offer additional plans on the public exchanges, including a new plan on the Illinois exchange in 2015.
But most importantly, United is a first mover on the international front. With its acquisition of 90% of Brazilian health insurer Amil Participações S.A. in late 2012, United has nearly 5 million covered lives in one of the largest and fastest growing health care markets in the Americas—a market that is still largely untapped. With only 25% of the population currently insured, United is poised to be a big player in a market where an expanding middle class is driving up enrollment numbers. United reported international revenue of $6.4 billion in 2013, and international revenue of $1.6 billion in the first quarter of 2014 is consistent year-over-year. United's revenue growth should continue to be fueled by its international expansion.
United's network optimization and market diversity, coupled with favorable shifts in its present headwinds, continue to make the company an attractive prospect today. But as the health insurance industry develops, United's inherent advantages should become even more pronounced. With its high membership volume, United is in a better position than new plans and smaller peers to leverage cost-effective contracts with the quality providers it needs to achieve and maintain 5-star ratings. Favorable provider contracts are key to controlling costs in the shadow of that great unknown—the health of the insured population—and a serious competitive advantage.
Andrew Lippman is long UnitedHealth Group and his father is an employee of the company. The Motley Fool recommends UnitedHealth Group. 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.