UnitedHealth Earnings: How Heath-Insurance Firms Profit From Government Business

Last Updated Jul 22, 2010 10:32 AM EDT

"As Maine goes, so goes the nation" is a longtime axiom of American politics. If the second quarter results of UnitedHealth Group (UNH), one of the two largest U.S. health insurers, forecast similar results for the industry as a whole, insurance companies are sitting on top of the world -- at least for now.

For both the quarter ended June 30 and for the first half of the year, UnitedHealth's revenues and profits were up nearly across the board. Overall in Q2, the company enjoyed a 31 increase in net income to $1.1 billion on revenues of $21.1 billion, up nearly 7 percent from the prior-year period. For the first half of 2010, volume rose 6 percent and net soared 20 percent.

The bulk of United's revenue comes from its health benefits segment, which includes its insurance companies. The volume increases there were comparable to those of the group as a whole in Q2 and the first half, but the growth in operating income was spectacular. For the second quarter, the division's operating earnings jumped 44 percent; for the first half, they were up 35 percent.

This is all the more remarkable in light of the fact that 75 percent of United's insurance enrollment is in the commercial sector, which lost 440,000 members over the past year as people got laid off and lost their coverage. Nevertheless, United more than compensated for that loss by increasing its Medicaid and Medicare Advantage businesses. Medicaid enrollment grew by 16 percent while Medicare Advantage members increased by 17 percent. Also on the upswing were enrollment in United's Medigap and Medicare drug plans and consumer-driven health plans, which drove an increase in the banking business of United's OptumHealth division.

As one would expect, the major reason for the increase in United's Medicaid revenues is the recession-fueled growth in Medicaid recipients. Cash-strapped states are relying heavily on Medicaid managed care plans to help them balance their budgets, and United is glad to oblige. Since 2002, the company has been rapidly expanding its presence in the Medicaid market, and the recent results show that this has been a wise move.

More puzzling is United's rapid expansion of its Medicare Advantage plans. After all, with the Affordable Care Act poised to curtail government subsidies to this program, one might expect health plans to be trimming their sails in this area. But for companies like United and Humana, it's still full speed ahead. Perhaps this is because there's still good money to be made in Medicare Advantage, while the commercial business continues to falter.

One interesting sidelight to the commercial sector: Although enrollment in employer-provided plans shifted markedly from fully insured to self-insured plans from 2008 to the present, United says that the trend reversed in the second quarter of 2010. While the number of people in "fee-based" (i.e., self-insured) plans decreased by 25,000, the number of those in "risk-based" (fully insured) plans rose by 95,000. What that means isn't clear, but it could indicate that big companies are shedding workers at a faster pace than small to medium-sized firms.

It will be interesting to see whether other companies' second-quarter results match those of United. If that's the case, however, it will not necessarily portend a turnaround in the insurance industry. It might just reflect an increasing emphasis on public-sector business that will be unsustainable in the long run.

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  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.