- Revenue grew 9.3%
- Operating income increased 19%
- Adjusted EPS rose 23%
- 2019 EPS growth guidance revised slightly higher to about 14%
"The wholesale disruption of American health care being discussed in some of these proposals would surely jeopardize the relationship people have with their doctors, destabilize the nation's health system, and limit the ability of clinicians to practice medicine at their best. And the inherent cost burden would surely have a severe impact on the economy and jobs, all without fundamentally increasing access to care."
If the U.S. ever adopted some form of single-payer healthcare, then the private health insurance industry could effectively be wiped out in America, or at least limited to non-covered expenses such as premium services.
After Mr. Wichmann made his comments on the call, all health insurers' stock prices proceeded to decline sharply, as did many healthcare stocks such as pharmaceuticals.
Specifically, the HHS proposed a new rule banning backdoor drug rebatesbetween drug companies and pharmacy benefit managers (PBMs), Part D plans, and Medicaid managed care organizations.
UnitedHealth's OptumRx is the third largest PBM in the country, and the HHS's consideration would effectively remove the safe harbor clauses that protect it from accepting discounted drug prices from the pharmaceutical industry.
- Democrats would need to regain control of all three branches of government
- The Senate's Filibuster rule would need to be eliminated
- The Senate would need to pass it with a majority vote (not guaranteed since this policy is highly controversial and Democratic senators from conservative states could vote against it)
- The 5/4 conservative-leaning Supreme Court would have to uphold the law because it's likely to be challenged as unconstitutional
The market is constantly weighing the probabilities of good and bad long-term outcomes for every business, baking all of those considerations into the current valuation.
Any company's path can unexpectedly deviate from the base case that's priced in by the market, which is why it's important for investors to diversify their portfolios across numerous sectors and businesses.
Throughout most of 2018 UnitedHealth's stock traded at a forward P/E ratio near 20, well above its long-term average, as investors rewarded the stock with a premium multiple for its impressive growth profile.
Sentiment quickly reversed this year as investors became anxious over the healthcare regulatory environment, causing UnitedHealth's forward P/E ratio to fall to about 15 (a discount to the broader market).
Of course, the market can be prone to overreactions. For example, biotech stocks lost around 50% between late 2015 and early 2016 following Hilary Clinton's promise to reduce drug prices if she was elected, according to The Wall Street Journal. However, those stocks ultimately bounced back.
For now, despite the market's swing, it feels too soon to worry about single-payer healthcare becoming a reality and damaging UnitedHealth's long-term outlook. Rightly or wrongly, investors have just nudged up the low probability of such an event occurring.
"Overall, rebates only exist on 7% of prescriptions. 90% of what we manage is generic with no rebates, 10% is brand, and subset to that is rebatable drug. When you look at in the Medicare market today none of that value we’ve managed from a discount rebate is held by us, it's 100% is passed on to our clients. And fully disclosed with CMS the 100% is passed on the Medicaid market, within our total client base. 98% of our discounts are passed on to our clients...the plan for rebates does not impact our bottom-line or our economics."
Simply put, management appears to be running the business conservatively and doing a nice job trying to stay ahead of changes in healthcare.
Regardless, investors considering the stock should understand that headline risks will probably remain high as the 2020 election season heats up. This might cause UnitedHealth's stock to remain weak or potentially even fall lower.
However, as the largest and most vertically integrated health insurer in the country, UnitedHealth is arguably the best-positioned company in its industry to adapt to almost any challenge regulators put in front of it.
The insurer's financial profile remains excellent as well, resulting in a very safe dividend profile based on the information we know today. Despite raising its dividend by over 20% annually in recent years, UnitedHealth's payout ratio remains below 30%. That level provides a comfortable margin of safety in the event of an unfavorable development with its PBM business or insurance operations.
Management's guidance calls for 14% EPS growth in 2019, and analysts expect a similar pace of growth will continue over the next five years, according to data from FactSet. UnitedHealth has raised its dividend every year since it began paying one in 2010 and will likely hike its payout once more with its next announcement.
The insurer's healthy dividend profile is supported by the firm's balance sheet, too. As you can see, UnitedHealth manages its business with low leverage, and its debt has even declined over time following some major acquisitions it made in the PBM space in 2015. Standard & Poor's also gives the firm a strong A+ credit rating.
A worst-case, single-payer healthcare scenario would still change the game for UnitedHealth and virtually all other businesses in the sector. However, the risk of large-scale government intervention, which is at least several years away, still seems unlikely to materialize.
UnitedHealth CEO David Wichmann's political statement denouncing Medicare for All as a bad plan for America and for healthcare stoked fears about the sector's future as the regulatory climate evolves. But for now, the likelihood of single-payer healthcare actually passing and disrupting UnitedHealth's business model appears low (due to partisan gridlock).
However, the risk of rebate changes at the federal level is higher. Fortunately, UnitedHealth appears to have insulated itself here as well, with 98% of all rebates already being passed onto customers.
Investors just need to remain mindful of the healthcare sector's complexities and practice good risk management, which means owning a well-diversified portfolio in case the worst-case scenario does happen to play out.