A stock from the West – UnitedHealthcare

Healthcare
Garry Laurence

Garry Laurence

Global Equities Portfolio Manager

The United States does not have a uniform health system and has no universal health care coverage. Healthcare in the US costs about twice as much as in the rest of the developed world. If the country’s US$3 trillion healthcare sector were its own country, it would be the world’s fifth-largest economy1.

UnitedHealthcare (UNH) is a leading healthcare provider of insurance and other healthcare related services in the US through its Optum business. Of the 170 million Americans that pay for healthcare individually or through employers, UNH serves 28 million through its fully insured and self-funded medical plans, offered through employers as well as directly to individuals.

UNH is focused on creating a more sustainable healthcare system: one that works better for everyone. It is gaining share in a growing market; there remain 85 million people in the US who are not covered by healthcare services.

In December 2019, UNH was recognised by for the first time by Kantar BrandZ’s ‘Top 100 Most Valuable US Brands’. UNH was ranked of 53 out of 100, with a brand valuation of $14 billion. The company’s focus on bringing relevant health plans to market is among the primary reason for the recognition, as well as the significant steps UNH has taken to elevate its brand and to position itself as a more consumer-centric company in recent years.

UNH is industry leading in managing medical costs. It was the first company to vertically integrate and acquire healthcare providers. It was also first to integrate pharmacy benefit managers and specialty care providers, allowing it better control over cost and greater visibility around future costs.

The company’s scale allows it to provide care at a lower cost. In areas where it dominates, the cost of providing care to patients is 30% lower than comparable healthcare providers. UNH continue to see opportunities to reduce costs and is shifting more than 20% of its medical spend to more effective sites such as ambulatory centres.

UNH also has best in class healthcare IT systems and is selling that capability to third parties through its Optum business. That business has grown more than Perpetual’s team had anticipated since first meeting with UNH’s management in Minneapolis several years ago.

Optum now works with nine out of ten US hospitals, more than 67,000 pharmacies and more than 100,000 physicians. It provides these customers with a combination of data, analytics and technology to manage their patients. Optum’s products and services range from Optumcare’s health management solutions, through to Rally’s digital consumer health platform, which encourages healthy behaviour and helps people schedule the most cost-effective care. OptumRx is an advanced pharmacy benefit management solution, while PreCheck Myscript embeds in a clinician’s workflow to show the clinician how much a drug will cost a patient. UNH continues to invest in innovation to ensure that Optum continues to capture market share and grow at a healthy rate.

UNH is well managed and has an excellent track record of growing its revenue and net profit at a double-digit rate. We have been impressed with the management team’s consistent execution over the years. David Wichmann was previously the chief financial officer and is currently the chief executive officer of UNH Group. The company has recently elevated Andrew Witty as President of both groups; he is tasked with overseeing Optum and is focused on using data to better provide care at a lower cost. 

We were presented with an opportunity to acquire this excellent company in October 2019 when there were concerns around changes in US healthcare policy to “medicare for all”. This would remove the need for commercial insurance.

Although political outcomes cannot be predicted, after undertaking significant due diligence and talking to participants in the industry, a “medicare for all” environment would prove to be a mammoth task for government. It would need to manage payments and manage a patient population to help it provide healthcare services, which would lead to a bonanza for UNH’s consulting business.

As a result, should “medicare for all” eventuate in the US, UNH will stand to benefit from a new ‘source’ of revenue opportunity. We were able to take the opportunity to acquire this business at a discount to the market, despite its quality and its growth in earnings being better than the market, a trend we expect to continue.


1. https://www.consumerreports.org/cro/magazine/2014/11/it-is-time-to-get-mad-about-the-outrageous-cost-of-health-care/index.htm

UnitedHealthcare is held in the Perpetual Global Share Fund.

 

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UnitedHealthcare is held in the Perpetual Global Share Fund.

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