UnitedHealthcare Earnings Preview: Will the Health Insurance Giant Emerge from Rare Market Turbulences?

UNH is scheduled to release its financial results premarket on July 16. Analysts estimate UNH to post revenue of USD 98.8 billion for 2024Q2, up 6.35% YOY; EPS is estimated to be USD 6.28, up 7.89% YOY.

Under the traditional fee reimbursement business model, only medical institutions like hospitals provided healthcare services. However, since the 1960s, the model of managed care has emerged, allowing commercial insurance companies to reach agreements with independent doctors to provide medical and health services to the insured, effectively controlling medical costs and addressing issues of excessive medical treatment, over-medication, and high payout ratios. UnitedHealth was born out of this environment.

UNH has created a business ecosystem that combines health insurance through UnitedHealthcare and medical services under the Optum brand. Since 2022, the profits from health management services have surpassed those from the insurance business for the first time.

Under this model, customer stickiness is strong, and the cost of switching is high, giving UNH a significant oligopolistic position. Smaller players or newer entrants may not be as nimble in adapting to value-based care models. Its medical resource network and comprehensive strength far exceeds that of Humana, Cigna, and Aetna. While the market has attracted interest from challengers, competing with those large players at scale has been a major obstacle.

The medical care ratio, which reflects costs, remains high, with analysts expecting a gradual alleviation over the coming quarters. UnitedHealth and Humana have both experienced a surge in service usage, which is expected to pose challenges into 2024.

Analysts at Moody's partially link this surge to accumulated demand from COVID-19 delays, followed by bottlenecks in appointment scheduling caused by workforce shortages among healthcare providers.

As for the total membership, there is continuous customer acquisition in the pure commercial insurance segment, while UNH has seen a decrease in the number of clients for the government-sponsored Medicare program for people age 65 or older and younger people with disabilities, which also has lower gross margins.

In February, UNH's stock price fell sharply due to cyber-attack incidents and antitrust investigations by the Department of Justice. In April, the announcement that the rates for government-funded Medicare medical services would remain unchanged triggered worries about a margin squeeze and led to another plunge in the sector.

In addition, the differing healthcare policies of the two parties in the United States mean that this year's U.S. elections will also be a factor affecting medical service providers like UNH.

Nevertheless, because the company's services cover 1.5 million doctors and 6,200 hospitals nationwide, it has a very strong network effect, and medical providers are unlikely to reject its insurance. UNH is deeply integrated with the American healthcare system, which is also a strong moat for the company.

Dean Ungar, vice president at Moody's said that beyond value-based care and their larger size, the major insurers have greater know-how around crafting provider networks and have a much deeper understanding of widely-used utilization management models compared to the emerging new entrants.

JP Morgan states that UNH's acquisition of LHC will expand the company's "Home Health" territory and continue to contribute to new revenue streams in the coming years, possibly acting as the next catalyst.

In contrast, Bloomberg analyst Glen M Losev is not so optimistic. He noted that health insurers' premium revenue growth is at risk over the next few years, as slowing economic activity could trigger a negative shift in enrollment mix and inadequate commercial-rate hikes.

Still, health-insurance premium rates have already jumped 4.6% to $477 this year, based on The Kaiser Family Foundation forecast going into 2024. The 2024 increase was the second annual gain after four consecutive years of premium decreases.