Online Extra: UnitedHealth: Vigor In Health Services

Deflation certainly isn't an issue in the health-insurance industry these days. Employers' spending on staff health care rose 14.7% on average in 2002, according to Mercer Human Resource Consulting. Those escalating costs have shown up on insurers' profit statements. Many of the largest in the U.S. are posting stellar profit gains for the third straight year. Few outfits have capitalized on the trend more noticeably than UnitedHealth Group (UNH), perhaps the industry's most diversified health-services provider. "Health-services provider" seems more apt a description than "insurer" for UnitedHealth because it has grown into a $25 billion conglomerate that sells much more than risk-based insurance. CEO William McGuire has turned the Minnetonka (Minn.) business into a leader in the management of self-insured company health plans (in which big corporations insure their own employees), state Medicaid programs, and "Medigap" insurance for seniors who want prescription-drug coverage -- something not yet offered under Medicare. "INEXPENSIVE" NOW. In casting such a wide net, UnitedHealth -- No. 3 in the 2003 BW50 list of best-performing companies -- is also reaping the benefits of a multiyear investment in health-care technology that McGuire calls health informatics. Generally, these are the information-technology services and management systems associated with health care: Data processing and storage for businesses and state health plans, Web-based interfaces for health-insurance customers, and software and tools that make enrollment and bill-paying much easier and cheaper for corporations. While UnitedHealth's stock, at $89 a share, isn't cheap, it has slid significantly from its 52-week high of $101 last October. "I think it's inexpensive compared to where it normally trades," says Peter H. Costa, analyst for Leerink Swann & Co. in Boston. He's looking for 2003 profits of $5.20 a share, or net income of $1.64 billion, which would be a 21% increase over last year, on 2003 revenues that would climb 16%, to hit $29 billion. At a price-earnings ratio of 21, Costa believes the stock still has legs. His 12-month price target is $110 a share. UnitedHealth's leading position in informatics is the primary reason why it should continue to do well, most industry analysts say. It's also a reason why some others -- such as major rival Cigna (CI) -- are fighting to keep pace. Philadelphia-based Cigna's 2002 earnings fell far short of expectations, in part because of "underwriting misjudgements," CEO Ed Hanway told investors in a conference call in October, 2002. Cigna's stock is trading at less than half its $111 per-share high. TECH EDGE. Other insurers, such as WellPoint Health Networks (WLP) and AFLAC (AFL) -- 2nd and 41st, respectively, in this year's BW50 list -- are performing well, too. But no health-services provider has IT systems as advanced as UnitedHealth's. And the outfit is the definition of diversification. It has its hands in nearly all segments of the business -- from conventional employer health plans to nursing-home care to supplemental Medicare insurance plans for members of the AARP. In its search for cost savings, UnitedHealth has also looked inward, Penshorn says. Last year, it cut back on its so-called "multi-option business," in which insurers compete to have their health plan among the three or four offerings in a corporation's menu of health-plan choices for employees. UnitedHealth's insurance tends to be among the more expensive plans on the menu because it allows a wider network of doctors, more choice of specialists and hospitals, and more services that are fully reimbursed. However, UnitedHealth realized that in many markets the sickest or most expensive employees were opting for its health plans from multi-option offerings. From a financial perspective, this was the downside of having the highest-quality plans. "Our cost exposure was disproportionately higher than the average cost per employee," says UnitedHealth spokesman John Penshorn. "We were losing money on many of these accounts because we didn't have the broadest range of customers to provide balance -- only the highest-cost customers," he says. It's that kind of housecleaning that has made UnitedHealth more financially fit, analysts say. ITS OWN BEST CLIENT. McGuire also has looked for ways to make the giant outfit more efficient. Because UnitedHealth has such a diverse set of businesses across so many areas of health care, they can buy and sell services from each other, one analyst points out. "The biggest customer of UnitedHealth's Specialty Care Services division [which includes behavioral health, vision, and dental coverage] is UnitedHealth," says Rob Mains, analyst for Advest, in Albany, N.Y. UnitedHealth is spending $1.3 billion a year buying its own services, Mains says. The elimination of unprofitable health plans, cross-selling among units, and the growth of specialty care and other nascent divisions have helped UnitedHealth achieve record revenues and earnings. In 2002, net income increased 35%, to $1.35 billion, or $4.25 a share, while revenues increased 7%, to $25 billion. The expectation is for more of the same. If economic or political conditions change dramatically, no one can guarantee that UnitedHealth will continue to put up such stellar numbers. But current conditions favor it. Medicare is still getting sufficient budget increases to keep most insurers happy. And with so much consolidation among health insurers recently, the strongest and biggest companies should thrive. With roughly one in seven Americans now a served by at least one of UnitedHealth's businesses, it's well-positioned to stay on top