The largest health care insurer in the United States, UnitedHealth Group Inc. (NYSE: UNH) has made decisions in the last few years to alter the course of its position in the health care industry. Not only is it moving in multiple directions, mainly away from its primary core revenues of health insurance premiums, but as the first to do so, it’s creating benefits for smaller companies in the industry, such as Aetna Inc. (NYSE: AET) and Humana Inc. (NYSE: HUM). Much of the change in the industry is being driven by outside forces, such as the Affordable Care Act, pharmaceutical pricing control calls and a general need to respond to market forces. ACA Upsets the Industry The ACA has caused tremendous shock waves that have altered UnitedHealth's future outlook. Before the ACA, the majority of the insurer’s bulk revenue was received from commercial sources, companies that provided health care insurance to employees by contracting with a health insurance company. With the changes in the industry from the ACA, including state health insurance exchanges and the prevalence of high-deductible plans, there is a shift to revenue streams. Now these revenue streams are being converted to state and federal insurance payments. From expanded coverage under Medicaid and Medicare to the plans developed under the ACA, the government is quickly becoming the largest payer of health insurance premiums. UnitedHealth’s decision to move into 14 new state health insurance exchanges in 2015 came as no surprise, as they were already strong in these locations. However, this move's large negative pressures on earnings per share in 2015, and as far reaching as 2017, has caused the company to reassess its strategies. Surprise expenses on administration and education in ACA plans and a higher percentage of defaulting on payments has led to much lower earnings on these health insurance premiums. UnitedHealth’s New Directions UnitedHealth has made other decisions in the last five years to expand its reach, which has helped diversify its revenue streams away from just health insurance premium revenues. A new division in the company, Optum, offers administrative, consultative and management services to care providers, health plans, government agencies and others. This segment of UnitedHealth’s revenue is actually the fastest-growing segment of revenues. With its recent acquisition of Catamaran Corp. (NASDAQ: CTRX), the company is also positioned in the pharmaceutical industry, enabling it to expand its influence on drug pricing and to affect cost-lowering initiatives in its health insurance premium segments. UnitedHealth has left the industry’s advocacy group, American Health Insurance Plans (AHIP). This decision was rumored to be made based on the group’s chief lobbyist leaving, but it is more likely due to UnitedHealth’s changing focus as a more comprehensive health care provider. How Aetna and Humana Benefitted Aetna and Humana have benefitted from UnitedHealth's decisions. First, Aetna has moved away from the fee-for-service model of payments in favor of a fee-for-value model of payments to health care providers. This frugal strategy ensures that health care providers are paid for results, instead of simply providing services. In this way, a patient's health is being put first. UnitedHealth's moves required a response from other providers. In the case of Aetna, it meant a reimagining of their payment model in a way that not only lowers its costs, but also provides more effective health care. Aetna also followed UnitedHealth's example by leaving AHIP in favor of conducting its own advocacy. Humana invested time and money into a study of its own employees to confirm the benefits of a different health care strategy. The study tracked all employees of the company with surprising results. Those employees who participated in the company’s new vitality program, which encourages employees to be proactive with their health and wellness, suffered fewer emergencies and hospitalizations, and employees who did not participate showed a 17% increase in health care-related costs. Humana believes moving to a pay-for-results system encourages healthier Americans while supporting bottom line revenue. The health care insurance industry was shaken to its core with the ACA, but industry giant and leader UnitedHealth has helped shape the way forward for many health insurers. The future path to growth and profits is found in the government-sponsored insurance plans, as well as a diversification in the health care field into administrative, consulting and direct care operations for insurers.
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