How UnitedHealth Group Makes its Money (UNH)

Future generations won't believe it, but there was a time when health care in the United States worked like this: You felt sick, you saw a doctor, and you paid for the doctor's services as you would an oil change. Today, even something as simple as refilling a prescription requires a physician deemed suitable by your insurer, a health maintenance organization, a list of approved drugs, an approved pharmacy, probably a pharmacy benefits plan, and perhaps one or maybe three levels of government approval for good measure.

Among the middlemen tasked with making today's health care efficient and cost-effective is UnitedHealth Group Inc. (UNH), the country's largest healthcare company.

Primarily an insurer, UnitedHealth Group claims over 130 million customers worldwide. The company has two divisions: UnitedHealthcare, its benefits arm; and Optum, a branch that encompasses three separate sectors: OptumRx, a mail-order pharmacy; OptumHealth, which operates health savings accounts; and OptumInsight, a payment processor for health-care providers. UnitedHealthcare dwarfs Optum, accounting for about 81% of UnitedHealth Group's revenue in FY 2017. (For more, see: What Country Spends the Most on Healthcare?)

On July 17, 2018, UnitedHealth Group reported Q2 earnings with revenues of $56.1 billion, up 12% since last year.  

From at least one perspective, health insurance seems like a great deal for the consumer. It provides a sense of security knowing that if you get into an accident or contract a serious illness you'll be taken care of. Health insurance companies, such as UnitedHealth Group, foot the bill for numerous surgeries and treatments costing tens of thousands of dollars each. So how can this be a good business? The reason is that the healthy customers are essentially paying for the sick ones.

Take for example appendicitis. Five percent of the population will get appendicitis at some point in their lives, and many of those will need an appendectomy. The average individual health insurance cost was about $4,700 in 2017 and the surgery is closer to $17,000 — hence the people who didn't need the surgery — the other 95% — covers the ones who do. (For more, see: Intro To Insurance: What Is Insurance?)

That said, co-pays cover just about every health care transaction that an insured makes. UnitedHealth Group pays out a lot, but it also takes in a lot. The company billed $65 billion in Medicare and retirement premiums last year. Advanced-age care comprises UnitedHealthcare’s largest sector, which makes sense, given the relative indisposition of elderly folks. It’s followed by $52.1 billion taken in from employer and individual plans. People in the workforce have cheaper upfront costs than retirees and they outnumber them greatly. In total, consolidated margins on UnitedHealth Group’s insurance operations were 7.6%, enough to turn $15.2 billion in net earnings. (For more, read: Planning for Healthcare Costs in Retirement.)

Insurance is UnitedHealth Group’s primary moneymaker, but the Optum group is a nimble and aggressive secondary business which is more than earning its keep. Optum has a high operating margin of 7.4%. In December of 2017, Optum got a bit larger when UnitedHealth Group bought DaVita Medical Group, a kidney based physician network, for $4.9 billion. The deal sees the company expanding evermore into both the insurance and health care provider businesses. (See also: Fitbit in Healthcare Deal With UnitedHealth)

Health insurance is one of those phrases that’s gone from clear to idiomatic to bearing no resemblance to its original meaning. Most forms of insurance in other realms involve paying a small amount to insure against the risk of massive loss. Health insurance as it’s currently constituted, at least in the U.S., means partnering with an enormous corporation to pay for even routine maintenance. It’s akin to your home insurance policy covering vacuuming. And, since March 23, 2010, you're required to use insurance whether you want to or not. The result: 300 million mandated customers and only a handful of approved insurers. The differences among one insurer and the next are often indistinguishable; every giant insurer has to offer health savings accounts, summaries of benefits and coverage, etc. UnitedHealthcare offers cheaper plans than some of its competitors given comparable deductibles, thanks to a larger network of physicians and other medical clients. It should be noted that UnitedHealth Group pulled out of the individual market in 2016.

Health care isn’t as vital a necessity as food or water, but it isn’t far behind. With an American population that's becoming ever more medicated, the smart money says that the healthcare industry won’t shrink. Whatever the industry as a whole does, UnitedHealth Group will continue to be one of its largest players. (See also: Top 3 Healthcare ETFs for 2018)