Last year didn't give UnitedHealth Group (NYSE:UNH) investors much to get excited about. The health insurer's stock ended down a little over 2% during 2015. Still, though, UnitedHealth's earnings performance turned out better than ever. Is the nation's largest health insurance company poised to enjoy its best year yet during 2016? Here are three keys for making it happen.
1. Exiting the exchanges
In October 2015, UnitedHealth was singing the praises of the Obamacare exchanges. Just over a month later, the company changed its tune. There's a strong possibility that UnitedHealth will make the decision to pull the plug on its Obamacare exchange presence by the middle of this year.
The reality is that UnitedHealth's Obamacare exchange plans are a drag on profits. The more claims the insurer saw, the more UnitedHealth knew it had a growing mess on its hands. By the end of 2015, the company had lost $720 million because of the deteriorating situation with the exchanges.
I predict that UnitedHealth will indeed announce in several months that it intends to withdraw from most, if not all, state exchanges in 2017. What's more, I think doing so will help the stock's performance. Wall Street tends to cheer when companies get rid of unprofitable business so they can focus on more profitable pursuits.
2. Optimizing Optum
Optum continues to reign as UnitedHealth's fastest-growing business unit. That growth is driven largely by pharmacy benefits manager OptumRx. Success for UnitedHealth in 2016 will depend heavily on success for Optum -- and OptumRx, in particular.
The acquisition of Catamaran in 2015 should bear fruit for OptumRx this year. Combined operations of the two PBM units gives OptumRx larger economies of scale that should help it compete more effectively for new business.
While PBM services will still bring in the most revenue, Optum's other two units -- OptumHealth and OptumInsight -- could also experience strong growth in 2016. Demand for OptumHealth's consumer health management and collaborative care delivery programs seems likely to stay on the upswing. OptumInsight's backlog for its technology products and services also continues to increase, a good sign for strength in the New Year.
3. Checking the competition
Another important thing UnitedHealth must do to win in 2016 is to, well, simply win. The competitive landscape is changing in some dramatic ways. Some of those changes might help UnitedHealth, but others could present challenges.
Anthem's (NYSE:ANTM) merger with Cigna (NYSE:CI) will make the combined company larger than UnitedHealth in terms of number of members, although UnitedHealth will keep the top spot when it comes to revenue. This merger could present UnitedHealth with opportunities to gain self-insured business in 2016 from organizations that might be a little concerned about the tumult that can arise in major corporate combinations.
However, another move by Anthem could end up creating some competitive difficulties for OptumRx. Anthem has threatened to end its contract with giant PBM Express Scripts (NASDAQ:ESRX). Because Anthem is Express Scripts' largest customer, it would leave the PBM with a huge hole to fill should a breakup happen. I would expect Express Scripts to aggressively go after new business to make up for lost revenue, which could put the squeeze on OptumRx.
Whether 2016 actually turns out to be UnitedHealth's best year yet will probably depend on what metric you use. If you're looking for the best year for stock performance, I wouldn't count on this year making the cut. After all, UnitedHealth's shares gained a whopping 49% back in 2004. That's a hard act to follow, particularly if the overall market experiences a down year in 2016.
On the other hand, if your barometer for best year hinges on earnings, the scenario looks much better. I think that UnitedHealth will achieve record earnings this year -- as long as it delivers on the three items mentioned earlier.