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3 Reasons UnitedHealth Group Stock Could Rise

By Dan Caplinger – Mar 5, 2016 at 11:58AM

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The health insurance giant has stayed near all-time highs for the past year. Here's how it could keep climbing.

The revolution in the health-insurance industry has presented both opportunities and challenges for UnitedHealth Group (UNH 3.74%), which has a dominant position in providing health insurance and related healthcare-management services. Over the past year, UnitedHealth stock has stayed near its all-time record highs, but it hasn't made much progress toward breaking through them. Now, though, there are several factors that could help boost UnitedHealth's prospects for the future. Let's look at three reasons why UnitedHealth stock could rise.

A potential Obamacare exit
Late last year, UnitedHealth shook the health-insurance industry with news that it was revising its earnings estimates downward because of the challenges of the healthcare exchanges created by the Affordable Care Act. CEO Stephen Hemsley said that "growth expectations for individual exchange participation have tempered industrywide, co-operatives have failed, and market data has signaled higher risks and more difficulties." Hemsley added that UnitedHealth's own claims experience had confirmed those trends, and he quantified the impact at $425 million, including $275 million from the early recognition of losses for the future 2016 year.

At its subsequent investor conference, UnitedHealth gave more detail on the decision-making process. The company immediately pulled back on marketing efforts for the 2016 policy year, and it said it would figure out during the first half of this year what its longer-term plans would be regarding Obamacare for 2017 and beyond. Presumably, if the company exits the exchanges for 2017, then it would be able to pull back some or all of that $425 million into income.

UnitedHealth was careful to note that the Obamacare exchanges wouldn't be a decisive factor in the insurer's overall success. Nevertheless, with Hemsley having expressed regret in not waiting longer before jumping into the Obamacare realm, investors would likely celebrate a decision to cut off an unprofitable business.

Urgent-care acquisitions
Healthcare delivery has also seen some big changes lately, and the rise of drugstore retail health clinics has transformed expectations among the public about where they get their healthcare. UnitedHealth Group hasn't ignored that trend, and its moves to make investments in the urgent-care-center industry have bolstered its Optum unit's presence there. Specifically, the MedExpress acquisition almost a year ago immediately added more than 140 neighborhood medical centers to UnitedHealth's network, and the company expected to open 25 to 30 new centers following the acquisition.

The key benefit for UnitedHealth is that every trip that a patient makes to an urgent-care center potentially avoids a much costlier visit to an emergency room. Given that most of its rivals don't operate urgent-care centers, UnitedHealth has the potential to dominate this area and develop in-house capabilities that other companies won't be able to match.

Gains from pharmacy benefit management
Elsewhere within Optum, UnitedHealth has also seen success in its pharmacy-benefit management unit. The acquisition of Catamaran expanded UnitedHealth's reach and gave it more bargaining power against pharmaceutical companies.

Now, UnitedHealth is well-positioned to benefit from an anticipated war against high-priced drugs. The political winds in the presidential election campaign have characterized drugmakers as price-gouging extortionists, and that's putting UnitedHealth on the right side of the contentious argument. By maintaining a neutral stance on exactly where it gets important prescription drugs from, UnitedHealth hopes to widen margins to the maximum extent possible. As that happens, investors should reward UnitedHealth with higher share prices to reflect the growth it achieves.

UnitedHealth Group has produced huge long-term gains for shareholders, and so its recent pause doesn't necessarily bode ill for the stock's future. These three factors could push UnitedHealth stock higher if they turn out well for the health-insurance giant.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. 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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