Among the middlemen tasked with making today's healthcare efficient and cost-effective is UnitedHealth Group Inc. (UNH), the world's largest healthcare company by revenue. UnitedHealth Group generates revenue from a variety of sources, including premiums on risk-based products, fees from various services, sales on healthcare products, and services and investment.
UnitedHealth Group began in 1974 as Minnesota-based Charter Med Incorporated, reorganizing just a few years later into United HealthCare Corporation and eventually into its current structure and name. Throughout its history, the company has acquired a number of competing healthcare providers; most recently, in June of 2019, UnitedHealth Group purchased online patient platform PatientsLikeMe for an undisclosed sum, according to MobiHealthNews.
Primarily an insurer, UnitedHealth Group claims over 130 million customers worldwide. The company has two divisions: UnitedHealthcare, its benefits arm, and Optum—a branch that encompasses three separate sectors: OptumRx, a mail-order pharmacy; OptumHealth, which operates health savings accounts; and OptumInsight, a payment processor for healthcare providers. UnitedHealthcare dwarfs Optum, accounting for about 81% of UnitedHealth Group's revenue in FY 2018.
UnitedHealth Group has a market capitalization of nearly $240 billion as of July 10, 2019. In 2018, it reported $226.2 billion in revenue, up more than 12% from $201.2 billion for 2017. The company's revenue has ballooned in recent years: for context, in 2014 UnitedHealth Group reported revenues of just under $130.5 billion. Return on equity for 2018 was 24.4%.
Across all of its business, UnitedHealth Group served about 141 million people as of Dec. 31, 2018.
Source: UnitedHealth Group 2018 Annual Review
UnitedHealth Group's Business Model
From at least one perspective, health insurance seems like a great deal for the consumer. It provides a sense of security knowing that if you get into an accident or contract a serious illness you'll be taken care of. Health insurance companies, such as UnitedHealth Group, foot the bill for numerous surgeries and treatments costing tens of thousands of dollars each. So how can this be a good business? The reason is that the healthy customers are essentially paying for the sick ones.
Take, for example, appendicitis. Five percent of the population will get appendicitis at some point in their lives, and many of those will need an appendectomy. The average individual health insurance cost was about $4,700 in 2017 and the surgery is closer to $17,000—hence the people who didn't need the surgery, the other 95%, cover the ones who do.
Health insurance is one of those phrases that’s gone from clear to idiomatic to bearing no resemblance to its original meaning. Most forms of insurance in other realms involve paying a small amount to insure against the risk of massive loss. Health insurance as it’s currently constituted, at least in the U.S., means partnering with an enormous corporation to pay for even routine maintenance. It’s akin to your home insurance policy covering vacuuming. And, since March 23, 2010, you're required to use insurance whether you want to or not. The result: 300 million mandated customers and only a handful of approved insurers. The differences among one insurer and the next are often indistinguishable; every giant insurer has to offer health savings accounts, summaries of benefits and coverage, etc. UnitedHealthcare offers cheaper plans than some of its competitors given comparable deductibles, thanks to a larger network of physicians and other medical clients. It should be noted that UnitedHealth Group pulled out of the individual market in 2016.
UnitedHealth Group primarily generates revenue through its premiums, its fees for various medical and consulting services, and sales of medical products and services. It also generates revenue from investments and other income sources, which we will not cover here.
- UnitedHealth Group earns revenue from premiums, fees, sales, and investments.
- The company divides its operations into UnitedHealthcare, its benefits branch, and Optum, which is further divided into subcategories for OptumRx, OptumInsight, and OptumHealth.
- UnitedHealth Group is the largest healthcare company in the world by revenue.
UnitedHealth Group's Premiums Business
Co-pays cover just about every healthcare transaction that an insurer makes. UnitedHealth Group pays out a lot, but it also takes in a lot. The company billed about $68 billion in Medicare and retirement premiums last year. Advanced-age care comprises UnitedHealthcare’s largest sector, which makes sense, given the relative indisposition of elderly folks. It’s followed by premium revenue from employer and individual plans. People in the workforce have cheaper upfront costs than retirees and they outnumber them greatly. In total, premiums accounted for about $178.1 billion in revenues for UnitedHealth Group in 2018, or nearly 79% of total revenues.
UnitedHealth Group's Products and Services Business
UnitedHealth Group's other products and services range from healthcare equipment and tools to consulting and technology, among many others. These are often delivered via consultants, direct sales, or wholesale agents. Products generated $29.6 billion in revenues for 2018, while services brought in $17.2 billion in revenues.
About 80% of UnitedHealth Group's revenue is generated from premiums.
UnitedHealth Group's Optum Business
Insurance is UnitedHealth Group’s primary moneymaker, but the Optum group is a nimble and aggressive secondary business that is more than earning its keep. OptumHealth provides care delivery, consumer engagement, and health financial services, among other products. OptumInsight is focused on major participants in the healthcare industry, providing expertise, technology, and other services. OptumRx is a pharmacy care company. In 2018, OptumHealth generated $24.1 billion in revenue, while OptumInsight brought in roughly $9 billion and OptumRx claimed $69.5 billion.
As UnitedHealth Group acknowledges in its 2018 annual review, the U.S. is in the early stages of a dramatic re-envisioning of healthcare thanks to technological development, regulatory changes, and more. The company aims to be at the forefront of these new developments and has already worked to harness new technologies like artificial intelligence (AI) to improve its patient care and product offerings. UnitedHealth Group is also aiming to grow along with changes to the ecommerce and retail landscapes, particularly with regard to its OptumRx platform.
As an insurance company making most of its money from premiums, UnitedHealth Group always faces the risk of miscalculating medical and administrative costs. With 80-85% of premium revenues going to pay the costs of healthcare delivered to its customers, UnitedHealth Group has a relatively slim margin for error in these calculations.
An Uncertain Future for Healthcare
Another major challenge is the constantly shifting regulatory landscape, which holds tremendous power over healthcare companies. With the Affordable Care Act still a highly contentious political issue, UnitedHealth Group must position itself to be able to adjust its business model in the face of potential changes in regulation.
Given its significant number of customers, UnitedHealth Group is particularly vulnerable to information breaches, cyber attacks, and similar challenges as well.