The medical giants in the domestic Internet era especially like to build an HMO system with the goal of "building China's 'joint health'", but on the other side of the ocean, the giant ship has long since turned the bow.
Beginning in 2009, United Health skyrocketed on the NASDAQ, with its stock price rising from $20 to $500 today. Even after the covid-19 pandemic, stock prices have not pulled back, but in the spring of 2022, they have come out of a two-year period of stock price stagnation, doubling again at the beginning of the third year of the epidemic.
United Health's stock price is supported by its rising return on investment, with annual report data showing a five-year return on investment of 338.16%, far exceeding the S&P 500 and 1.65 times that of the Dow Jones Industrial Index.
Comparison of 5-year cumulative total returns of United Health and Economic Trends (Data Source: United Health Annual Report)
Ten years of steady growth, the rebound of the epidemic period, what has built today's joint health?
The mystery of HMO's king of mergers and acquisitions
In 1974, a group of doctors formed a group called Charter Med Incorporated to help people get more effective and broader care. Four years later, former member Richard Burke and Paul Ellwood, the originator of the "HMO" concept, inherited the ideas of the Charter Med Incorporated organization and co-founded United Healthcare.
With the HMO model gaining a foothold in north-central regions such as Minnesota, United Health began to expand its business coverage through large acquisitions. By the time it acquired Sierra Health Service in 2008, it had spread its presence in all 50 U.S. states, establishing a sizeable market in each state.
United Health M&A history (Data source: Arterial Network)
This "buy, buy, buy" model has supported the insurance giant's continued growth for the first 20 years of its existence, but when the millennium began, United Health gradually found that its insurance "could not move".
In the past, United Health has always followed the logic of opening up new states to increase the number of members, the essence of which is to directly take down users who already have the willingness to buy insurance through mergers and acquisitions. However, when the US market is opened, if United Health wants to continue to expand its local insurance business, it will have to find new users in the stock market, and the cost of customer acquisition will rise rapidly.
In 2010, the logic of mergers and acquisitions of United Health began to change drastically.
Since the way to increase the number of members has reached a bottleneck and can no longer fully support the rapid growth of the enterprise, the management has begun to re-examine its own internal resources and find new growth points from the stock, and its foothold is the model value and data value.
The closed-loop advantage of "medicine-drug-insurance" under the HMO model is that it can standardize and measure medical services and pharmaceutical expenditures, and realize the risk control of health insurance business. As a company with an absolute advantage in the insurance field, United Health has turned around to make up for medicine and medicine, which can quickly make up for the closed loop and reduce medical insurance expenditure.
The fundamental transformation of the business system dates back to 2004. This year, United Health reclassified its business logic with "insurance" as the dividing point, splitting the company into two parts: UniteHealthcare and Optum. The former is in charge of insurance business, while the latter absorbs non-insurance businesses such as medicine, medicine, consulting and education, and personal finance.
United Health Business System (Data source: Arterial Network Collation)
But in the early years, the Optum business has been slow to develop, with profits accounting for less than 20%, and revenue growth has been positive and negative, very unstable. Until 2010, United Health has spent tens of billions of dollars to acquire PBM business provider Catamaran, medical IT ChangeHealhcare and other leading enterprises, and then won the surgical operator Solar Care, rapid diagnosis company Alee Health, in the medical services, PBM and medical informatization to bet heavily on the technology dividend of the medical digital era.
Judging by the results, The radical strategy of United Health has been very successful. The blessing of medical insurance technology enables it to continuously optimize the product structure, reduce premium expenditure, and effectively control the risk of compensation. The increase in the fields of medical services, health management, and PBM has helped both doctors and patients to continuously reduce medical costs, and attract more users to join while reducing insurance expenditures.
At the same time, relying on its huge data collection, Optum's consulting and education and financial services are also growing. United Health has published its impressive data on its website: Optum serves 80% of hospitals in the United States, 90% of Fortune 100 companies, 90 life sciences companies and 127 million users.
Over the past decade, Optum's profit scale has accelerated to catch up with the insurance business with double-digit growth, driving United Health's stock price to rise. In the recently released 2022 annual report, the profit of the Optum series business even slightly surpassed the insurance business ($1,199.5 billion: $1,197.5 billion) for the first time.
Profit comparison of the two major businesses of United Health (unit: US$100 million, data source: United Health Annual Report)
Today, the rising Optum has broken the growth dilemma under the single profit model of United Health. The behavior of cutting into the "high-tech" market such as big data, chronic disease management, and digital medicine is constantly refreshing the ceiling that United Health can touch - continuously growing profits and expanding valuation space, which together support the optimistic expectations of investors.
What is more important than growth?
Business innovation continues to introduce new blood to the development of United Health, which can explain the rising valuation, but when it comes to the steady growth of the business in the past 20 years, it depends on the company's sophisticated risk control system. In this part, we can analyze one by one from a macro and micro perspective.
On the macro side, the advantage of United Health lies in the deep synergy between The two businesses of UniteHealthcare and Optum.
Optum initially focused on medical services and health insurance technology, helping UniteHealthcare to win profits by reducing the cost of premium payment, and the two maintained a one-way promotion relationship of "Optum Service UniteHealthcare". But as UniteHealthcare's HMO system grew stronger and Optum's independent business matured, UniteHealthcare began to feed Optum back, channeling users and providing relevant data to it.
With the support of UniteHealthcare, the scale of medical services and personal finance businesses in the Optum health system has expanded rapidly, and Optum sight, which is backed by massive user data, has also grown by leaps and bounds - it has valuable resources that are difficult for other consulting firms to reach.
Profits from Optum's three businesses have been rising due to a combination of acquisitions and synergies (in US$100 million, source: United Health Annual Report)
This synergy can be partially quantified with data. In The financial information of United Health, there is a column called Elimination data, which measures the premium expenses that are double-calculated.
Excerpts from the financial data of United Health's 2021 annual report (Data source: United Health Annual Report)
The gross profit of the joint health insurance business can be roughly calculated using premium income + self-paying medical service income - insurance reimbursement expenditure. However, in the annual report data, the gross profit of United Health is equal to premium income + medical service income - insurance reimbursement expenditure. The difference between medical service revenue and self-paying medical service income forms Elimination, which is determined by the number of medical services and the amount reimbursed by insurance, so it can be used to measure the synergy between the two businesses of United Health , a figure that has maintained double-digit growth for a decade.
Change in the offset of Joint Health's income (in US$ 100 million, data source: United Health Annual Report)
According to the annual report data, UniteHealthcare's profit has declined in 2013, 2014, 2015 and 2021, but the overall profit is still growing due to Optum's profit and The strength of Elizabeth. With the help of Immunation, we can judge that uniteHealthcare's deep synergy with Optum has spread the risks of joint health and provided great support for its growth.
Let's talk about the micro. In the first year of COVID-19, when the U.S. insurance industry was on the brink of collective bankruptcy and had to apply to the government for huge relief, United Health came up with a staggering 20 percent profit growth figure.
Under the U.S. policy, insurance companies such as United Health are required to pay for the costs associated with pneumonia treatment for patients infected with the new crown, but they will not provide additional premiums. For a patient who is hospitalized for a month due to COVID-19, the insurance company will pay more than $300,000 ($400,000 for the full cost, and $100,000 for the patient).
In this regard, John Rex, financial director of United Health, gave two reasons for the increase in revenue: one is that the growth of Optum's business has led to the growth of the overall business; the other is that the emergence of the new crown epidemic has suppressed the treatment of other diseases by patients, and they see patients less frequently than before, which may offset the growth of new crown-related premiums to some extent.
On the other hand, insurance companies are also controlling premiums through some other means. For example, United Health pays extra attention to the condition of susceptible people such as children and pregnant women, because the deterioration of this group may lead to higher follow-up costs.
In terms of technology, United Health has used the epidemic to promote low-cost remote access and telemedicine. The data shows that UnitedHealthcare completed about 33 million remote visits in 2020, a figure of 1.2 million in 2019, an increase of 2500% year-on-year. Optum Care Clinic had fewer than 1,000 telemedicine visits in 2019 and increased to 1.5 million in the last nine months of 2020, saving a huge cost for Allied Health.
How long can united healthy growth last?
Investors in the secondary market are always keen to predict the inflection point facing listed companies, especially for companies like United Health, which have been rising for a decade. After all, the transition between red and green always comes unexpectedly at some point in time, especially when the underlying problem is stirring.
As mentioned above, UniteHealthcare, which is responsible for the insurance business, has encountered bottlenecks, and although the total revenue has maintained growth, the decline in profit growth is also an indisputable fact.
United Health has repeatedly sought to expand its insurance business in overseas markets, but the multi-party dependence of the HMO structure on policies, medical services, and government expenditures has determined the difficulty of model replication. In late 2017, United Health had planned to acquire Empresas Banmédica, a company that provides medical services to Chile, Peru and Colombia, but was eventually stopped by the local government.
Optum, another support point for enterprises, also faces challenges. Among them, the profit growth of Optum Rx, which is responsible for the PBM business, has passed the dividend period brought by mergers and acquisitions, and the growth rate is closer to "0"; while Optum Health, which includes the medical business, although maintaining growth, has always faced contradictions brought about by the system itself.
Specifically, let's talk about the contradictions that Optum Health faces. In the HMO system, the premise of reducing the payout rate is to reduce medical costs and save costs for insurance companies and patients. However, the blind reduction of medical rates will inevitably cause dissatisfaction among doctors, especially after the United States required insurance companies to disclose medical insurance prices in January 2021, and the different medical rates between United Health and regional hospitals caused great dissatisfaction among medical institutions, and many medical institutions have terminated cooperation with United Health and withdrawn from the system.
The only business that has grown without much risk is Optum Sight, which consults education under Optum, which primarily serves hospital doctors and only about 100 life sciences companies have procured related businesses. Despite this, although the business accounted for only 4.2% of revenue in 2021, it contributed 14.2% of profits and continued to grow at a rate of 20%.
Profit margin growth across Optum's businesses has changed
Under the vast B-end market, optum Sight, which takes data as the core support, has a bright future. After all, in the era of medical big data, whoever controls the business has seized the opportunity to create disruptive innovations.
In this $100 billion market, Joint Health is expected to recreate a joint health.
Chinese dreamers in HMOs
Looking at the medical and health giant ships built by United Health for more than 40 years, we can roughly summarize the key to its success in two points.
First, United Health has created an HMO system that matches the government insurance system and meets the needs of a large number of consumers; second, it expands horizontally and vertically based on this model, creating advantageous barriers while using data to find new and high-quality growth points.
Back in China, United Health is regarded as a beacon of guidance, and a large number of domestic insurance and Internet medical companies have joined the construction of China's HMO system, and Enterprises such as Ping An and WeDoctor have made good achievements.
Both types of companies have the potential to become the leaders of China's HMO, but the model built on this will certainly not be a model copied from the United States. After all, they have to selectively address the following issues.
The first is the characteristics of the market. The basis of the United Health HMO is the scattered medical resources and expensive medical costs in the United States, and there is a CMS to help users cover some of the insurance costs. The domestic market is non-profit and difficult to gather, and lacks a stable payer to provide premium support, which makes it difficult for the domestic HMO system to make the business model scale even if it can establish a profitable business model.
CMS (Centers for Medicare and Medicaid Services) revenue as a percentage of total joint health premium revenue
The second is the completeness of the HMO system. United Health builds HMO based on "medicine", which not only has its own medical infrastructure with considerable strength, but also can use its monopoly position in health insurance to attract high-quality medical institutions to join the system in a cooperative manner. In contrast, although domestic insurance companies and Internet medical companies are also building medical infrastructure, they do not have the strength to compete with public hospitals, so they are not too attractive to high-quality medical resources.
Finally, domestic enterprises intend to establish a joint model of medicine, medicine and insurance, but under the non-single system, it is difficult for them to achieve a win-win situation of medicine, medicine and insurance. It can be seen from the HMO model of United Health that insurance, medicine, and medical services are a relationship of one after another, which also means that if there is no complete subject to achieve overall planning, the domestic system built by insurance companies and pharmaceutical companies often has multiple goals, lacks common goals and corresponding incentives, and can only be barely maintained in a loose relationship.
However, the challenges facing the domestic market are also opportunities for the first movers.
In 2002, McGuire, then CEO of United Health, believed that the federal government would eventually increase funding for Medicaid, and he pushed ahead of consensus to acquire AmeriChoice, which owns a Medicaid business, against the backdrop of almost every other health care company's reluctance to do Medicaid, a prediction that won Union Health a lot of the Median market.
Today, domestic HMOs are facing the same choice dilemma.
Under the high pressure of domestic medical insurance, the 2 trillion yuan health insurance premium target in 2025 has illuminated the prospects of the industry. At this time, who can grasp the trend of the policy and find the model that best matches the policy, who can hope to take the lead in the future health insurance market and rewrite the pattern.
*Cover image source: 123rf