The market’s view is that UnitedHealth Group Inc (NYSE:UNH) is the one stock you should buy today. It’s true. No company has done as well in the Obamacare era as UnitedHealth. Since the Affordable Health Act was signed in 2010, UNH stock is up nearly 400%, and its dividend has gone from 12.5 cents to 62.5 cents. It’s the industry’s version of Amazon.com, Inc. (NASDAQ:AMZN).
But, like Amazon, United now has a target on its back. Unlike Amazon, UNH may be unable to maintain its lead, because this target is a political one, and the political times are changing.
As the Obama Administration gives way to a new Clinton Era, United’s dominance and profitability are bound to come under scrutiny from reformers anxious to lower costs. It will be a target-rich environment.
How UnitedHealth Makes Money
UNH dominates the employer-paid health insurance space through scale, technology and control of the drug supply chain. It dominates the Medicare supplement or “Medigap” market as well, thanks to its marketing alliance with the American Association of Retired Persons.
For the quarter ending in September, the company reported net income of $1.9 billion, $2.17 per share, on revenue of $46.293 billion. This compared with net income of $1.6 billion, $1.77 per share, and revenue of $41.5 billion a year ago.
Only 78% of revenue came from insurance, however. The big gain is in “products,” specifically the OptumRx Pharmacy Benefit Management business, where revenues have more than doubled year-over-year following its purchase of rival Catamaran for $12.8 billion last year. Optum margins were 6.9% for the quarter, against 4.3% for UnitedHealth itself.
What UnitedHealth has done, in short, is cherry-pick its market for the most profitable niches. Its big news this quarter was its decision to exit the Obamacare exchanges, after experimenting with a new unit called Harken Health.
I think this decision is going to bite UNH stock in the end by focusing the attention of both the industry and politicians on how it operates.
Where UNH Stock Is Vulnerable
When Mylan NV (NASDAQ:MYL) CEO Heather Bresch was told to answer for high EpiPen prices by Congress last month, she wound up blaming PBMs. Attention focused on industry-leader Express Scripts Holding Company (NASDAQ:ESRX), but that stock is actually down almost 20% this year. The owner of the second-largest PBM, CVS Health Corp (NYSE:CVS) is down 11%.
It’s Optum that has been gaining. Optum Health gives UnitedHealth control of a vital piece of its supply chain — the part that isn’t people. As Bresch noted, this control is an invitation to corruption.
UNH stock is also vulnerable because of its sheer size. The company’s four largest competitors in the health insurance space — Anthem Inc (NYSE:ANTM), Cigna Corporation (NYSE:CI), Humana Inc (NYSE:HUM) and Aetna Inc (NYSE:AET) — are worth a combined $140 billion in market cap. UnitedHealth’s market cap is $146 billion. Efforts by its rivals to merge, in order to compete a little more closely, were thwarted by the Justice Department’s antitrust division.
For anyone interested in reforming the health care system, UnitedHealth represents a target-rich environment.
UNH vs. Clinton
UnitedHealth is a savvy political player. In 2014, most of its money went to Republicans. In this cycle, it’s evenly split … or so it would seem. Two-thirds of its contributions to party Political Action Committees this cycle have gone to Republicans.
Should Republicans retain control of the House or Congress, UNH’s allies should be able to prevent changes to the ACA. Should a Clinton landslide turn into a Democratic Congress, however, look for a big bullseye to go onto the back of UnitedHealth CEO Stephen J. Hemsley as the new Administration “follows the money” toward reform. Even absent that, a new Justice Department antitrust division, and a new team at the Department of Health and Human Services, could cause UNH stock some major headaches.
If there’s a Democratic landslide on Nov. 8, sell UnitedHealth on Nov. 9.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in CVS.
