Rising Medicaid enrollment tied to the Affordable Care Act led to UnitedHealth Group (NYSE:UNH) overcoming a decline in commercial health insurance membership, resulting in strong fourth quarter and full year 2014 sales and profit.
By the numbers
UnitedHealth Group is the nation's biggest health insurer with members enrolled in plans offered in the commercial, individual, Medicare, and Medicaid markets. UnitedHealth is also a major provider of health care IT solutions and pharmacy benefit services through its Optum Health business.
In the fourth quarter, UnitedHealth reported revenue of $33.4 billion, up from $31.1 billion a year ago. Sales for the full year also grew, increasing 7% from $122.5 billion in 2013 to $130.5 billion in 2014.
The strong top line performance, leveraged against cost cutting and lower costs tied to providing care to members, led to earnings per share of $1.55 in the fourth quarter, up 10% from the year before. The strong fourth quarter earnings allowed UnitedHealth to deliver full year earnings per share of $5.70, which outpaced the company's prior earnings per share guidance for a range of between $5.60 and $5.65.
UnitedHealth's results are impressive considering that membership declined in its employer & individual health insurance business.
UnitedHealth took a tepid approach to the ACA's health insurance exchanges during the first open enrollment period, choosing to participate in just four states the first time around. That cautious approach resulted in exchange enrollment that was too low to offset commercial and individual market membership losses tied to employers reducing employee access to health insurance plans and individuals shifting to competing plans offered through the federal and state exchanges. As a result, UnitedHealth's Employer & Individual segment membership tumbled by 680,000 people in 2014, causing revenue in that segment to slide by $1.8 billion to $43 billion in 2014.
In addition to the revenue headwind tied to falling commercial and individual enrollment, UnitedHealth also had to navigate profit headwinds resulting from newly implemented ACA fees, which weighed down UnitedHealth's full year earnings per share by a full $1 last year.
Although UnitedHealth's results were weighed down by falling commercial membership and ACA fees, enrollment growth in Medicare and Medicaid products allowed the company to deliver both top and bottom line growth in 2014.
As more baby boomers are turning 65, the number of people enrolling in Medicare products, such as Medicare Advantage and supplemental Medicare, continues to climb. As a result, despite the planned loss of 150,000 members tied to exiting unprofitable markets, overall enrollment in UnitedHealth Medicare Advantage plans increased by 15,000 people. Enrollment in Medicare supplemental products and Part D products grew by 295,000 members and 215,000 members last year, respectively, too. Overall, revenue from Medicare related products grew 5% to $11.5 billion in the fourth quarter and by 4.6% to $46.25 billion for the full year.
Medicare product demand was strong, but Medicaid demand was even stronger. Thanks to Medicaid expansion in 25 states heading into 2014, total Medicaid membership in UnitedHealth plans surged by 1 million people in 2014, including 135,000 added in the fourth quarter alone. That jump in enrollment translated into a 37% year-over-year sales increase to $6.5 billion in the fourth quarter and a 29% increase in sales to $23.6 billion for the company's Community & State segment.
In addition to strong results for the company's government programs business, UnitedHealth also reported that price hikes in its global markets business offset membership losses, leading to global markets sales increasing 9% to $6.9 billion in 2014.
The company's expansion into data analytics and pharmacy management also paid off again last year. Revenue for its Optum Health segment improved 25% in 2014.
Optum's growth is particularly encouraging to investors given that Optum delivered a full-year margin of 6.9%, up 40 basis points year-over-year. That margin is better than the 5.8% margin that UnitedHealth gets from its traditional insurance businesses. Overall, Optum's operating profit totaled $3.3 billion in 2014, up from $2.5 billion a year ago.
Tying it together
UnitedHealth's decision to embrace the federal and state health insurance exchanges during the second open enrollment period, which began on November 15th and runs through February 15th, looks like it could pay off for investors in 2015. The company is participating on exchanges in 23 states this time around, including the five states that are reporting the biggest federal exchange enrollment (so far). That suggests that UnitedHealth's employer & individual market headwinds are likely to become tailwinds this year.
If so, the company could be able to achieve its full year 2015 guidance for sales of between $140.5 billion and $141.5 billion and earnings per share of between $6.00 and $6.25. Assuming that UnitedHealth does deliver on that forecast, it seems likely the company will continue to buy back shares and increase its dividend payout, which was expanded by 34% to an annual rate of $1.50 last June.