After reporting first-quarter financial results that were better than industry watchers' expectations, UnitedHealth Group (NYSE:UNH) revealed plans to stop offering policies on the Obamacare insurance exchanges in most states next year. The decision is the culmination of a months-long evaluation of the company's Affordable Care Act strategy, and it could significantly improve UnitedHealth's earnings in 2017. Find out how in this clip of The Motley Fool's Industry Focus: Healthcare podcast.
A transcript follows the video.
This podcast was recorded on April 20, 2016.
Kristine Harjes: This is something that is even more recent than the Illumina news. UnitedHealth Group announced that it was going to leave the Obamacare exchanges all but entirely. What does this mean?
Todd Campbell: Yeah, it's not a complete and utter surprise because they communicated that they were going to have discussions surrounding exiting Obamacare.
Harjes: They're anticipating $1 billion of losses between 2015 and 2016 because of these exchanges.
Campbell: Yeah, they lost, I think it was over $400 million last year. They came into the year thinking they were going to lose $500 million this year. Then in their conference call last night, they said, "We think we may lose $650 million." It may not sound like a lot when you're talking about a company with $44 billion in revenue, but this is a very low margin industry. If you look at their premium revenue of $34 billion or $36 billion, their earnings from operations on that business was only, I think, $1.6 billion or something like that -- very thin margin business. $650 million, I can understand why they want to rein in their exposure to that.
Harjes: If you're somebody that's interested as an investor in United, does this change your thesis?
Campbell: I don't think so. Do you?
Harjes: Is Obamacare even a big enough ... ?
Campbell: Do you think that people aren't going to buy that stock now because of Obamacare?
Harjes: No, I actually think it's a good thing. You're exiting something that was clearly not profitable for you. That's the example of the scientific method right there, is saying, "You know what? We tried this and it didn't work."
Campbell: Keep yourself open to opportunity. Other competitors in the space, they're not coming to the same conclusion -- "yet." We don't know if they will eventually come to that same conclusion. Obamacare exchanges are expensive because you've got people who weren't previously insured. They're now starting to go out and get care. That care is expensive. If you don't model for that correctly and you don't price your premiums correctly in the marketplace, you're going to lose money.
It's going to be very interesting to see how this plays out. I think that from a shorter-term perspective this is the right move for shareholders, because it allows United Healthcare to retrench, reevaluate, and then slowly, but surely begin to increase their exposure. You have to remember, too, that this company, they went from operating in just four states the first year, so three years ago, to 34 states last year. They expanded this extremely rapidly. It's hard for me to understand how they scaled it up this quickly without expecting there to be some problems.
Harjes: That's a good point too. It was a quick ramp-up and it looks like a pretty quick ramp-down, too. I actually do perceive that as a good thing where the company can look at its decisions and say, "OK, realistically, maybe that wasn't so smart. Let's backtrack a little bit here."
Campbell: There are going to be parts of the country that are going to be more profitable for insurers, based on how they design their patient pools. I think that once UNH digests all the information it's got now, it's going to have a much better chance of figuring out where those parts of the market are most profitable for it to participate, and those are the ones it'll stay in. As we go forward, maybe they'll start to fold in other areas in the coming years. Yeah, I think it's smart to retrench, think about where you're going and then roll it out from there.
Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool recommends 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.