UnitedHealth's (NYSE:UNH) latest earnings were so stellar that CEO Stephen Hemsley put on his happy face during the health insurer's recent earnings call. In fact, UnitedHealth's usually dour and terse CEO was so consistently upbeat he used the word "growth" a dozen times, ascribing "growth" to everything from the company's commercial business to Optum Care and OptumRx.
Hemsley also tossed a juicy bone to Wall Street's UnitedHealth bulls, advancing guidance to an almost torrid 10% year-over-year pace. Specifically, Hemsley projected "a $2 billion increase over earlier projections." The hike means management expects revenue to reach $143 billion this year -- which, for some context, is about the size of New Zealand's entire GDP.
It wasn't all sweetness and light, however. Here are five key points investors should know, including how UnitedHealth responded to several hot-button topics that threaten that projected growth.
1. Catamaran acquisition was all about creating a top-tier PBM
Optum CEO Larry Renfro quickly laid out UnitedHealth's rationale for its recent $12.8 billion acquisition of Illinois-based pharmacy benefit manager Catamaran Corp. (UNKNOWN:CTRX.DL). " The reason we bought and entered into this combination with Catamaran was because we needed scale," he said.
Assuming the acquisition goes through, "scale" is a done deal. UnitedHealth already owns the industry's third-largest PBM with its in-house OptumRx unit. Catamaran, by contrast, is the fourth-largest PBM by volume of prescriptions processed. After the merger, UnitedHealth will be neck-and-neck with CVS Health, which covers 65 million plan members, for No. 2. By comparison, top dog Express Scripts covers 90 million.
2. We're upping our game in negotiating drug prices
In the U.S., prescription drug spending rose more than 12% last year, the biggest annual increase in more than a decade. And that was despite both Express Scripts and CVS slashing prices from hepatitis C-drug makers AbbVie and Gilead Sciences, respectively.
UnitedHealth has made it clear it will increasingly take a very tough stance on drug pricing. Aiding its efforts, the company is a payer-insurer, as well as a PBM, which gives it a uniquely powerful position. As a PBM, UnitedHealth can negotiate pricing up front. As an insurer, it can establish controls on who uses the drugs, as well as track follow-through results, including actual health benefits.
UnitedHealth's Optum holds some of the most sophisticated tools in the U.S. for analyzing the impact of specific drugs on overall population health from a cost-benefit perspective. It gives UnitedHealth a platform for not only knowing how and where patients consume medical resources, but also morbidity profiles and synthesizing information into cost and performance data.
Pharmacy benefit managers don't trumpet in advance how and when they plan to negotiate price deals, but Renfro acknowledged that the goal of the merger was to "create a competitively scaled channel-agnostic PBM."
"Channel-agnostic" was a term coined by J.C. Penney management in 2011. It's business buzz-speak for "we don't care who we make deals with, we're going to get the best prices for our customers." Timothy Wicks, OptumRx's CEO, added, "We are agnostic to ... site-of care as well, and we will drive it to the best place of care for the consumer."
3. Expect a war against megapriced drugs
Obviously, specialty pharma is "a very, very important aspect of going forward," Hemsley said. Specialty pharma includes any drugs that cost $600 or more a month, and there's no doubt this is a hot-button issue.
UnitedHealth faces a significant risk here, since specialty drug pricing threatens to take a big whack out of insurers' profitability. Specialty drugs now account for 25% of U.S. insurers' total pharmacy spending. But that percentage is expected to double to 50% by 2018, according to healthcare analytics company Artemetrx . UnitedHealth projects specialty drugs could quadruple to $400 billion, or 9.1% of national health spending, by 2020.
"As specialty pharma emerges," Renfro said, "it really is a tremendous opportunity for us to distinguish ourselves. The cost of that category is such that it would be hard for us to believe that the customer community as well as the consultant community will not be sensitized to that category of cost."
There's more than one way to skin a cat, and Renfro pointed out that Optum recently teamed up with Yale University "as a partner." He added, "Research from the (Yale-UnitedHealth) lab has now been accepted for publication by the Journal of the American Medical Association and the British Medical Journal."
In other words, UnitedHealth has yet another arrow in its quiver with which to skewer drug companies. Going forward, it will not only negotiate pricing, it will finance research publicizing whether those prices are justified based on clinical benefits.
4. Feared increased utilization is not materializing
Meanwhile, UnitedHealth's medical costs are holding the line. This was a pleasant surprise to Wall Street, as the company's stock price took a hit when hospital administrator HCA Holdings pre-announced strong admission numbers. When asked about this in the Q&A session, CFO Dan Schumacher said he expected an increase in utilization of medical care. But, "I'll tell you in the first quarter there have not been any acceleration."
5. No plans to alter yearly dividend increases, but buyback is another story
Dividend investors can breathe a sigh of relief, as CEO Hemsley clearly intends to keep the dividend hikes coming: "We expect to maintain our approach to advancing our dividend to more market based levels, exactly as we have discussed this area of capital allocation with you previously, no changes are contemplated in that respect." [italics added]
When asked about cutting back on share repurchases to keep net debt low after the Catamaran purchase, he took a different slant. "We think (acquiring Catamaran) was a very good use of capital... and we expect that contribution to grow... much more than would a share buyback."
Management offered no comments about the impact of a Supreme Court ruling expected this June that could upend healthcare insurers.
To sum up, Stephen Hemsley went back to his favorite new word -- growth: "The story is really again about growth, growth in the revenues, earnings, based on more consistent performance for customers, growth in the number of people we partner with and serve across the health care system. And growth in the scope and diversity of our businesses."
That's about all they said, folks. See you next quarter.