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United Health group (UNH) Stock Price Drivers

UNH
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UnitedHealth Group’s stock price is mainly driven by revenues per enrollment, market share, number of enrollments, effective estimation pricing and management of medical costs and medical cost trends. Due to the high cost of medical services insurance companies usually forward the cost to consumers by charging them higher premiums. UnitedHealth Care (UNH) charges higher premiums but now, with the participation of the company in the affordable care act it will lower its price to meet the requirements. UNH is a market leader which allows it to lower prices to further gain market share. With PPACA, the number of enrollments is set to increase because of the 30 million people who are still uninsured. Medical care ratio is the percentage of premiums spent on the medical bills of customers. The lower the ratio the more income the insurance provider generates.

UnitedHealth Group Incorporation (UNH) Stock price drivers

Revenues per enrollment

Over the years, medical costs have risen. The rise in medical costs forces health insurers, including UnitedHealth, to pass on medical cost inflation to consumers in the form of higher fees and premiums. Another supporting factor is the fact that PPACA supports risk-based enrollments. These enrollments typically command higher premiums compared to fee-based enrollments. This has the potential to significantly push up the prices. On the other hand, the arrival of health insurance exchanges mark increased competition in the sector. Coupled with greater transparency and price information for the consumer, this would dampen premiums charged. Similarly, the medical care ratio mandate holds back the insurers to sharply increase the premiums should the medical costs jump significantly. Over time, managed care enrollment and employment has shown a relationship. As the number of employed increased (2009 and onwards), the number of managed care enrollments went up with it. The trend was more marked for commercial risk-based enrollments than for commercial fee-based enrollments.

Market share %:

UNH enjoys leadership position in its sector. This helps the company build and expand on its brand value and competitive plan pricing methods. The company’s business model has shifted from business-to-business model to business-to-consumer model with the introduction of user interface. Typically, businesses have largely sponsored health insurance plans in the capacity of employers. Now that the focus has shifted to the individual consumers, the result will be greater individual involvement and so higher individual preference for UNH health plans.

Number of enrollments

The number of enrollments is expected to increase dramatically as PPACA mandates that 30 million uninsured Americans will have insurance coverage as the Act is implemented.

Effective estimation, pricing and management of medical costs:

Directly impact profitability, under its risk-based benefit product arrangements, the company assumes the risk of both medical and administrative costs for its customers in return for monthly premiums. Premium revenues from risk-based benefits products comprise approximately 90% of company’s total consolidated revenues. The company generally uses 80% to 85% of its premium revenues to pay the costs of health care services delivered to its customers. The profitability of these products depends in large part on its ability to predict, price for and effectively manage medical costs.

Medical Cost Trends

The company’s medical care ratio, calculated as medical costs as a percentage of premium revenues, reflects the combination of pricing, rebates, benefit designs, consumer health care utilization and comprehensive care facilitation efforts. In 2012, the company managed its commercial medical cost trend to a level under 5.5 percent. The table below shows the medical care ratio of health insurers. With the exception of Cigna Corp, which has the lowest medical care ratio of 79.6% amongst all shown, UnitedHealth Group has the second lowest medical care ratio of 80.4%. The large-scale network of UnitedHealth operations, its economies of scale and lower utilization are responsible for the lower medical care ratio. Lower medical care ratio augurs well for UnitedHealth group as it means lower costs and positive impact on profitability.

Ticker

Name

Med Care Ratio      

SG&A Ratio

Average

Average

85.2

12.5

UNH US Equity

UNITEDHEALTH GROUP INC     

80.4

N/A

HUM US Equity       

HUMANA INC

83.7

15.1

CI US Equity

CIGNA CORP

79.6

N/A

WLP US Equity

WELLPOINT INC

85.3

14.4

AET US Equity

AETNA INC

82.2

18.8

 



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