UnitedHealth Mid Year Review: How Did Optum Perform In The First Six Months Of 2016?

UnitedHealth Group (NYSE:UNH), the largest health insurer in the U.S., operates two primary businesses – UnitedHealthCare and Optum. UnitedHealthCare includes the company’s private health insurance, Medicaid and Medicare segments, while the Optum division covers services such as pharmacy benefits management (PBM) and health care services.

Optum has been the primary growth driver for the company in the last few years, and it continued to drive results in the first two quarters of 2016 as well. In the six months ending June 30 2016, Optum revenues grew 53% year-over-year (y-o-y) to over $40 billion, driven by growth across all three sub-segments- OptumHealth, OptumInsight and OptumRx. 

Optum Sub-Divisions

OptumHealth revenues grew by 20% y-o-y to $8 billion in the first two quarters. driven by a 5% increase in customers served to 80 million as well as a 10% y-o-y increase in the average revenue per customer.

OptumInsight revenues grew by 23% to $3.4 billion, driven by growth in technology services, care provider revenue management services and payer service offerings. The segment’s revenue backlog also grew from $10.4 billion at the end of December 2015 to $11.3 billion at the end of June 2016. The biggest source of growth was OptumRx, UnitedHealth’s PBM business, with revenues growing 71% y-o-y to over $29 billion in the first six months of 2016. The increase in revenues was driven by recent acquisitions- Catamaran and Helios- though there was also organic growth in pharma care services.

OptumRx Drives Optum Top Line But Drags Down Margins

OptumRx, UnitedHealth’s pharmacy benefits management (PBM) business, is the largest subdivision of the Optum business. Its share of revenues has increased from 65% of total Optum revenues in Q2 2015 to 72% by the end of Q2 2016. This increase has primarily been fueled by inorganic growth through the acquisition of Catamaran for $12.8 billion (deal completed in July 2015) and Helios (deal completed in January 2016).

However, the rising proportion of OptumRx in overall Optum sales has negatively impacted the division’s margins, as OptumRx has considerably lower operating margin than other Optum segments. Compared to OptumRx’s operating margin of 4.2% in Q2 2016, OptumInsight and OptumHealth had margins of 18.5% and 7.6%, respectively.

Going forward, we expect Optum’s margins to remain under pressure as OptumRx’s share of Optum sales increases further. However, we expect the negative impact to taper off over the 4-6 quarters as OptumRx’s operating margin continues to improve. In the last year, the business’s operating margin improved 40 basis points to 4.2% in the quarter ending June 30, 2016. 

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