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.

UnitedHealth Group Inc. is out on Obamacare but in on the government

The insurer's first-quarter earnings release on Tuesday revealed its Medicare and Medicaid businesses are growing rapidly, even as it has pulled out of the Affordable Care Act's individual exchange markets.

UnitedHealth's success in these areas is likely to further press its biggest rivals -- Aetna Inc., Humana Inc., Anthem Inc., and Cigna Corp. -- to try to keep pace by buying smaller companies. It's a scary time for any of those four to do a deal; their efforts to combine into two giants have failed or devolved into dueling lawsuits, and the Republican party is refusing to give up on an unpopular attempt to repeal and replace the ACA.  

But with the individual market too risky as a source of growth, someone is going to overcome deal fears in pursuit of government business. 

Government Cheese
Growth in its Medicaid and Medicare businesses helped boost UnitedHealth shares Tuesday
Source: Bloomberg
Intraday times are displayed in ET.

UnitedHealth added more than a million Medicaid and Medicare members in the first three months of the year, driven largely by record enrollment growth in Medicare Advantage, a privately administered version of the government's insurance program for older Americans. UnitedHealth's government business accounts for 30 percent of its total enrollment and the majority of its insurance revenue. 

Among the five biggest insurers, Anthem is UnitedHealth's fastest-growing competitor in Medicaid enrollment, and Aetna is its fastest-growing rival in Medicare Advantage. Both of those companies would have to dramatically exceed their recent performance to match UnitedHealth's gains. 

Accelerant
UnitedHealth's competitors are falling behind as the company aggressively pursues government business
Source: Bloomberg

UnitedHealth is already the largest commercial and Medicare Advantage insurer. It's now chasing Anthem for its position as the second-largest Medicaid insurer after Centene Corp. The company's scale and complementary Optum business, which provides consulting, medical care, and pharmacy benefit services, make it an increasingly formidable competitor in every part of the health-insurance market.

Assuming Anthem's now lawsuit-ridden attempt to purchase Cigna follows Aetna and Humana's proposed tie-up to the dustbin of history, it will need other acquisitions to secure position in the Medicare Advantage market. Medicare Advantage favored by the GOP because it's run by private corporations instead of the government, and it will grow as the population ages. Any of these four firms could also take a calculated risk on Medicaid. Potential targets include WellCare Health Plans Inc., which has a presence in both government programs, and Centene Corp. and Molina Healthcare Inc., which have big Medicaid footprints. 

In Charge
Though attempted megadeals failed, smaller acquisitions could help UnitedHealth's competitors mount a more serious challenge to the firm's dominance
Source: Bloomberg
*Incorporates Universal American's 2016 MA enrollees.

Medicaid is a riskier bet than Medicare Advantage; the Republican plan to repeal and replace the ACA would cut more than $800 billion in funding from the program over a decade. But even though that risk remains, and both Molina and Centene are substantially exposed to the troubled individual exchange market, a deal for one of these firms is still in the cards. 

The ACA's Medicaid expansion might not be going anywhere, given the mountainous political barriers to repeal. The pool of potential enrollees may even grow. A Medicaid expansion in Kansas was only halted by its governor's veto after the GOP's health-care plan failed to pass the House. North Carolina and Virginia are attempting expansions, and a number of other states were considering it before the election. There's also a chance waivers granted to states exempting them from some ACA regulations may result in insurer-friendly changes to Medicaid.

UnitedHealth's government investments aren't just paying off in terms of size. Its growth in those businesses helped the firm beat analyst expectations for first-quarter results and its earnings forecast. UnitedHealth's revenue growth exceeded that of its rivals by nearly 10 percent in each of the past two years, and it may top them all again this year.    

The company's other revenue drivers are hard to emulate; there's little scale available for purchase in the employer-based insurance market, and UnitedHealth has a years-long head start with Optum. An acquisition to pick up more government business may be the quickest way for UnitedHealth's competitors to move the dial.   

Policy chaos and an antitrust hangover have been enough to dampen deal fervor so far this year. But don't expect UnitedHealth's rivals to sit idly by as it keeps chugging along. 

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