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.

Now that Obamacare looks like it might stick around a little while longer, maybe UnitedHealth Group Inc. should reconsider abandoning it.

Of course, the insurer's solid second-quarter results reported on Tuesday -- it beat analyst earnings expectations and boosted full-year guidance -- benefited from its retreat from the Affordable Care Act's (ACAs) individual exchanges. 

But odd as it may seem, given how well the decision to bail on the ACA has paid off, UnitedHealth should at least consider an eventual return. Getting out was arguably the right choice for the company last year. But if done right, returning could be a good idea, too. 

Juiced
Pulling back from Obamacare has helped juice UnitedHealth's shares. But it may not want to stay away forever
Source: Bloomberg

First, a caveat: This is conditional on the Trump administration not sabotaging the ACA and retaining cost-sharing subsidies that help low-income Americans afford insurance. A return to Obamacare would ideally happen after a bipartisan fix addressing other insurer concerns.

And that's quite a condition; President Donald Trump has signaled he'd rather see the ACA fail than fix it.

But the idea of a bipartisan fix isn't as far-fetched as it once was. Repeal-and-replace is likely dead. GOP senators are calling for hearings on market stabilization. And sabotaging the health-care system would be shockingly callous and could backfire politically. 

A test of the administration's intentions will come later this week, when a cost-sharing payment is due. UnitedHealth should be watching. 

The company's first ACA sojourn didn't go well. Imperfections in the law, along with Republican efforts, undermined several provisions that protected insurers. Growth didn't always meet expectations. And patients were sicker than anticipated.

UnitedHealth lost hundreds of millions of dollars on the exchanges in 2015 and 2016. It announced last April it would mostly pull out of the individual market in 2017. That has flattered its results, boosting operating margins and earnings.

Retrenching
Pulling out of the ACA has helped boost earnings growth at UnitedHealth's insurance arm
Source: Bloomberg

The exit has also shifted investor focus to the firm's consistently growing Optum health-care services and technology unit. UnitedHealth's shares are up 49 percent since it confirmed its ACA retreat. But now that the company has retrenched, there's a case to be made for expanding once more.

UnitedHealth's insurance business has been benefiting from Medicare Advantage, a private alternative to traditional Medicare. But UnitedHealth will face increased competition there from other large insurers, including Anthem Inc., Cigna Corp., and Humana Inc. Its opportunities to expand via acquisition are limited; it's already among the market-share leaders everywhere but the ACA exchanges. And the government rejected two insurance industry mega-mergers this year. 

UnitedHealth could continue to bulk up Optum; it has already shelled out more than $16 billion on deals focused on the unit over the past two years. But with $18 billion in cash on hand and healthy free cash flow, it has plenty of dry powder for other bets. 

Sustainable?
Rapid Medicare enrollment growth has helped boost UnitedHealth's insurance business, but other companies won't sit idly by
Source: Bloomberg

If the ACA's individual market continues to stabilize -- a huge if! -- it could be an attractive area of future growth, given how many other insurers have joined UnitedHealth in retreating. And there are are reasons to think the company might do better there a second time around. 

Rivals such as Molina Healthcare Inc. and Centene Corp. have largely thrived in the individual market. This suggests that, though UnitedHealth's struggles were partly due to ACA flaws, poor execution also had a role.

UnitedHealth can learn from those rivals and from its own experience, including its relatively successful Medicaid business -- a market with some similarities to the exchanges. And the company believes its integration with Optum's technology and other services gives it a cost advantage. There's no reason that shouldn't extend to the exchanges.

It's possible the Medicaid business might prod re-entry in another way. Some states are pondering cutting insurers who don't participate in the individual exchanges out of Medicaid contracts. When an analyst asked about that possibility on Tuesday's earnings call, CEO Stephen Hemsley said the firm hasn't seen any trend suggesting states will broadly tie the programs together. But given UnitedHealth is the third-largest for-profit Medicaid insurer and competes with firms with a much larger exchange presence, it's something to watch. 

An abundance of caution is warranted, and any expansion should be slow. But just because UnitedHealth very publicly broke up with Obamacare doesn't mean a reunion is impossible.

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