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Health insurance has become a vital product that hundreds of millions of Americans need, and insurance giant UnitedHealth Group (NYSE:UNH) has done everything it can to claim its share of those needing healthcare coverage. Coming into Tuesday’s second-quarter financial report, UnitedHealth investors were optimistic about the company’s ability to keep growing at a healthy pace, especially given the recent success of the insurer’s Optum unit. Even though expectations were fairly high, UnitedHealth was able to exceed them, and it also gave more favorable guidance about its results for the rest of the year. Let’s look more closely at what UnitedHealth told investors in its most recent report and what lies ahead for the health insurer in the future.
UnitedHealth gets a clean bill of health
UnitedHealth’s second-quarter results extended the streak of strong performance that the company has seen recently. Revenue soared 28% to $46.5 billion, topping the consensus forecast among those following the stock by nearly $1.5 billion. Net income of $1.75 billion was up 11% from the year-ago quarter, and after making provisions for certain extraordinary items, UnitedHealth posted adjusted earnings of $1.96 per share. That was $0.07 per share more than most investors were expecting to see.
Those who’ve looked at UnitedHealth over time won’t be surprised to see that its Optum unit led the way in terms of growth. Revenue from the services provider soared by more than half, easily outpacing the 14% growth rate from the UnitedHealthcare segment, and the OptumRx unit was responsible for the bulk of that growth. Optum’s operating earnings were also healthier than the health insurance segment, rising more than 45% compared to a 4% drop in operating income at UnitedHealthcare. Optum continues to be a key part of UnitedHealth’s overall success, and at its current pace, it might catch up with or even surpass UnitedHealthcare’s contribution within the next few years.
Within the insurance segment, revenue growth came from across the board, with even the long-struggling global division posting a modest 2% rise in sales. All three of the other subunits within UnitedHealthcare posted growth rates of 14% to 15%, and the company boasted a 320,000-member jump sequentially. Yet UnitedHealth once again noted the negative impact of Obamacare on the segment, saying that it suffered $200 million more in individual product losses than it had originally projected in connection with Affordable Care Act-compliant policies. Also, the company pulled back from its coverage under Medicare Part D, reducing member counts by 135,000 on a year-over-year basis to 4.9 million.
UnitedHealth CEO Stephen Hemsley was positive and succinct in his comments about the quarter. “Our businesses were privilieged again this quarter to have grown to serve more customers and consumers,” Hemsley said, and “we continue to invest to differentiate our products and services to better serve our customers and fuel future growth.”
Will UnitedHealth stay healthy?
UnitedHealth also improved its guidance for the rest of 2016, further showing its optimism about its future. The company boosted the bottom end of its previous earnings guidance by a nickel per share, making the new range for adjusted earnings $7.80 to $7.95 per share. Stronger profit margin figures at Optum have been especially helpful in increasing overall profitability, and they were probably instrumental in helping UnitedHealth narrow its earnings projections toward the upper part of the previous range.
Still, UnitedHealth investors have to be concerned about the extent to which the company’s Affordable Care Act business has eaten into its profitability. The insurer offers ACA-compliant policies in about two-thirds of the states in the U.S., but it is making efforts to narrow its focus and pull out of jurisdictions in which it is losing money. That’s a trend that many healthcare policymakers are worried about, but for UnitedHealth, it looks like the right business move under current industry conditions.
UnitedHealth shareholders didn’t react all that strongly to the health insurer’s results, with the stock trading on either side of unchanged in pre-market trading following the announcement. If the insurance giant can keep riding the health services market to strong gains, then UnitedHealth should be able to keep its stock near all-time record highs in the months and years to come.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.