Changes in the health insurance industry have forced UnitedHealth Group (NYSE:UNH) to take major steps to adapt. Even though some of the ways in which UnitedHealth has responded to the new environment have been favorable, the stock has gone nowhere over the past year after rising nearly fivefold since 2010. Some investors now believe that several factors could put an end to UnitedHealth's record-setting run and send shares lower for an extended period. Let's look at three reasons why UnitedHealth stock could fall.
UnitedHealth has been the largest health insurance company in the industry for a long time. However, recent merger negotiations have threatened that status, and if the proposed combination of Anthem (NYSE:ANTM) and Cigna (NYSE:CI) goes through, it will create a colossus in the industry that will surpass UnitedHealth in terms of members.
The deal is far from a sure thing, in part because antitrust concerns linger. A letter from the American Hospital Association pointed to the combination as increasing the dominance of Blue Cross Blue Shield plans that in turn could undermine competition. Hospitals have their own worries about more difficult negotiations that are prompting their response, though, and so antitrust regulators might not find their arguments compelling. In addition, the merger of Aetna and Humana will leave UnitedHealth Group in a triumvirate of insurers in which it would no longer play an obvious leadership role.
Some believe that heightened competition might actually be better for UnitedHealth in that would-be customers might go with the stability that it offers rather than dealing with a rival that's undergoing a major corporate transformation. Nevertheless, once initial issues get hammered out, larger competitors will put more pressure on UnitedHealth to keep up the pace. If it can't, then its stock could easily suffer as a consequence.
Continuing poor performance in UnitedHealth's overseas market
UnitedHealth Group is best-known for its U.S. business, but the company has also established a beachhead overseas as well. The acquisition of Brazilian healthcare giant Amil in 2012 set the stage for the company to enlarge its worldwide footprint and take advantage of what at the time were promising conditions in the health insurance industry.
Since then, Brazil has gone through a major recession, and plunging commodity prices continue to weigh on the nation's prospects. UnitedHealth has felt the impact, as its UnitedHealthcare Global division saw full-year 2015 revenue plunge 21% to $5.5 billion. The unit did say that it returned to profitability last year, and in local-currency terms, revenue grew 11% for the year. UnitedHealth also reported that efforts to improve internal operations resulted in 80,000 more customers during the fourth quarter.
The question for UnitedHealth is whether Brazil will bounce back as quickly as it fell during the commodity bust. Structural issues throughout Latin America will have an impact on Brazil even if commodity prices rebound, and that could put pressure on clients who turn to Amil for health insurance. UnitedHealth didn't talk about its international business to any major extent in its most recent conference call, but a setback there could hamper the insurer's long-range plans.
UnitedHealth's pronouncement in November that it would have to cut its earnings estimates for 2015 because of Obamacare-related expenses had a major impact on the entire industry. The insurer said that it expected to take a $425 million hit from products it offered on health insurance exchanges under the Affordable Care Act, $275 million of which was attributable to anticipated 2016 losses.
However, even though UnitedHealth said it would reduce its exposure to Obamacare exchanges this year, it left open the possibility of continuing to serve the market in 2017. As CEO Stephen Hemsley said at an investor conference shortly after the initial announcement, "It will take more than a season or two for this market to develop," and so it's possible that the company will take another stab at the exchanges next year or further into the future.
Hemsley has assured investors that "we will not knowingly lose money in this product line." However, the federal government has a lot invested in the program, and given the extent to which UnitedHealth relies on government access to programs like Medicare Advantage, the insurer will face pressure not to abandon Obamacare. If that pressure results in future losses, then UnitedHealth stock could suffer.
UnitedHealth Group's stock has had a good run over the years, but some see it as overdue for a pullback. If any of these factors goes badly for the company, then UnitedHealth stock could take a hit at least temporarily.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Anthem and 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.