Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Welp. It's happening. 

UnitedHealth Group announced on its earnings call Tuesday that it will bail on Obamacare's individual insurance exchanges in all but "a handful" of states in 2017. The company, which warned last fall it might take this step, expects to lose $650 million on exchanges this year. So far, 22 of the 34 states the company sold insurance in this year have confirmed the company will exit next year. 

Though individual markets in some states will be less competitive as a result of UnitedHealth leaving, the aggregate impact on Obamacare is likely to be fairly modest, according to a Kaiser Health study.

As for UnitedHealth, its other businesses are thriving. Even with an 8-cent-per-share Obamacare-related charge, the company beat analyst EPS expectations in the first quarter. Optum, the company's consulting, pharmacy benefit, and technology division, grew its revenue by more than 50 percent year-over-year, while helping keep costs lower in the insurance business. In that context, it's hard to make much of a case for continuing a risky, failing Obamacare bet. This move lets the company focus itself, and the market's eyes, back on the part of its strategy that's working. 

Investors certainly seem to like the retrenchment; UnitedHealth shares are up nearly 5 percent since it announced earnings and the extent of its exchange abandonment. 

Obamacare Exit Gets Applause
UnitedHealth beat earnings estimates and announced that it's abandoning Obamacare's individual exchange insurance markets in all but a few states, sending shares up.
Source: Bloomberg
Intraday times are displayed in ET.

The company is sick of investing in and losing money on a business it entered late compared to competitors. It can now cherry-pick the states where it's not going to lose buckets of money. And Obamacare is a small enough part of its business that it can easily divest without hurting its growth potential. 

The company only covered 795,000 people on exchanges as of the end of the first quarter. That's a fairly minor portion of the nearly 13 million people who have enrolled in exchange plans this year. The company added nearly as many new people in its commercial insurance business (about 700,000) in just this quarter as it serves on exchanges in total. 

UnitedHealth's real star, and the reason there's less pressure for it to fight tooth and nail in the exchanges, is Optum. The unit not only negotiates with drugmakers on price, but offers consulting services and develops technology and analytics for health-care providers. UnitedHealth made a big bet on the business with its $12.8 billion purchase of pharmacy benefit manager Catamaran last year. Optum provided UnitedHealth just short of $20 billion, or 36.1 percent, of revenue in the quarter. The company said on Tuesday's earnings call it hopes Optum will provide 42 percent or more of operating earnings this year. 

Gaining Share
UnitedHealth hopes its non-insurance business, Optum, will drive revenue growth this year.
Source: Bloomberg

UnitedHealth is taking a different path than its biggest insurance competitors, the soon-to-combine Anthem/Cigna and Aetna/Humana. Those firms are chasing scale through mergers and the individual exchange market. UnitedHealth was the 500-pound gorilla of insurance for years, but stayed out of this round of megamergers, is pulling back from a growing insurance market in Obamacare, and will no longer be the biggest health insurer in the U.S. should its competitors' deals close.

But those competitors don't have a large and rapidly growing pharmacy benefit, consulting, and technology business. On its earnings call, UnitedHealth said the U.S. market for Optum's services could be $680 billion (without exactly defining the parameters of that market), while the market outside the U.S. could be $500 billion, for a total north of $1 trillion.

Those projections probably represent the sort of starry-eyed optimism and reality-adjacent math that would do a startup proud. But should the company capture even a fraction of a market approaching that size, then people are going to forget pretty quickly about that time it bailed on Obamacare. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net