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Kevin O'Leary

Perspective on UHG's Q1 2022 Earnings Call

April 24, 2022
Company Research

UHG hosted its Q1 2022 earnings call on Thursday, continuing its streak of impressive quarterly results. UHG generated over $5 billion of cash from operations in Q1 alone. UHG’s CEO Andrew Witty summed up the momentum nicely at the end of the earnings call:

And I think what you're continuing to see, and I hope you've heard some of that in the conversation today, and it's certainly reflecting through the results, is the synergy opportunities which are coming to life between the two organizations. You heard a lot about value-based care. Now that whole value-based care model, which we believe is truly capable of transforming experiences, not just for patients, but for physicians and payers.

Per usual, UHG covers a lot of ground very quickly in its earnings reports. Here are a few of our takeaways from earnings:

Takeaway 1: UHG’s VBC flywheel is spinning in overdrive

UHG has built an incredible flywheel between UHC and Optum, leveraging its insurance business to generate cash flow to acquire assets that allow it to capture more of the healthcare dollar (via VBC deals), which drives more cash flow to the parent entity. UHG seems to grasp what many startups in the space have failed to realize - flywheels in care delivery and insurance start and stop with cash flow and while VCs can subsidize cash flow losses for a period of time, eventually to build a viable business you’re going to have to figure out how to generate cash flow. Look no further than the recent LHC Group acquisition as a case study in UHG’s flywheel - UHG uses its cash to acquire a massive profitable home health asset that allows the enterprise to take on more risk-based contracts and drive more free cash flow. It’s a winning playbook.

It shouldn’t be surprising that this strategy is working incredibly well at the moment, as evidenced by UHG sharing that it now expects VBC membership to grow by 600,000 versus 500,000 in 2022. 

Optum Health revenue per consumer served increased 33% over the year ago quarter, driven by growth of people served under value-based care arrangements. Optum Health now expects to serve 600,000 new patients under such arrangements in 2022 compared to its initial outlook of 500,000. The results reflect the continued expansion of care services offered, with at-home and digital offerings complementing and integrating with growing clinic-based and outpatient services, including ambulatory surgical care. 

It’s also worth noting that OptumHealth CEO Wyatt Decker shared in the earnings call that this growth is organic, not the result of acquisitions:

Is it organic growth that added that additional 100,000? And the answer is yes. We saw strong results in open enrollment, member retention.

Any way you look at it, that is a really impressive growth number. 

Takeaway 2: Analysts are still trying to understand how much room there is to grow in VBC

For all the positive results UHG shares, it actually shares very little information on the mechanics of how its VBC business is performing. For instance, compare UHG to agilon or Oak Street, which both go in depth into specifically how their book of business is performing and growing over time - what the cohorts look like, how repeatable the results are, and so on. It actually seems like in many ways those companies are bearing the burden of educating the analysts on the right questions to ask of a value-based care business, in order to ask the right questions to larger players like UHG.

UHG is so large that it has the benefit of saying very little about the mechanics of its value-based business. It essentially shares one (very impressive) data point about the business, that OptumHealth is growing revenue per customer served by 33% year over year (see paragraph above). While it’s great to know that revenue is growing that much, that number actually says next to nothing about how the business is actually performing - it just says that they’re signing up more value-based contracts. 

See for instance these two analyst questions, which come at this topic in slightly different ways:

Question 1: Wanted to ask a question about value-based care. First, kind of with the improvement in the outlook for penetration there. I'm curious, if you were to step back and look at the entire kind of value-based care operation you have and think about the penetration in terms of capitation if you could share that number with us. Meaning the total TAM there of your physicians and their patients, how many of them are already in value-based care, and what's the potential still to come?
Question 2: I wanted to go back to the growth in OptumHealth for a minute. Can you talk a little bit about what drove that 100,000 higher number? Is that an organic number? Is that driven by deals? Is it direct contracting? Is it internally United? Is it external? Is there some way to kind of think about that growth and what drove it? And then I guess, just generally speaking, when you think about deals in that space, how are you thinking about multiples, either on earnings, or on where you think the longer-term earnings can eventually be when you move that practice to capitation?

Both of these questions get at the same underlying concept: how much opportunity is there for UHG to transition OptumHealth from fee-for-service to capitated contracts and capture the valuation upside by doing so? It’s the right question to prod, as in many ways the answer to this question feels like it will dictate how much growth UHG has in front of it over the coming years.

So as long as the flywheel point one holds, not much is going to get in the way of this business growing (as mentioned above LHC is a good example of this). Us healthcare nerds can debate all we want about how much UHG is integrating the assets and how patient experience and quality are improving, however, at the end of the day, the strategy above and successful growth trajectory UHG has, will continue if they continue to grow lives and can acquire more assets pursing VBC.  

Takeaway 3: The DSNP business is taking off

For the last few years UHG has been highlighting the opportunity in the Dual Special Needs Plans (DSNP or Duals) market, and it appears that they’re now seeing that opportunity materialize in a meaningful way. From the earnings release:

In the first quarter of 2022, UnitedHealthcare grew to serve 1.5 million more people than a year ago, led by continued strong growth in Medicare Advantage and Dual Special Needs Plans and in the broader Medicaid market.

Wyatt Decker, Optum Health’s CEO, also noted that a third of the growth in value-based lives for Optum Health will come from Duals patients, meaning that they’ll grow by about 200,000 lives in that market alone. The scale and pace at which this business is growing is really impressive.

Takeaway 4: UHG is seeing success with virtual first plans

UHG mentions in a few different places how they’re seeing strong uptake of virtual plans, and sheds some light into the strategic rationale behind launching virtual first plans. There are essentially two reasons, it seems:

Reason 1: It’s a good marketing tool to drive new membership. 

Never underestimate the power of an “innovative” offering to serve as a shiny object that attracts new members in the commercial market. As UHG highlights in the press release, these plans drove 350,000 new members (including physician-led offerings) in the past year:

UnitedHealthcare’s expanding portfolio of innovative, new offerings for people served by commercial benefits, including physician-led, consumer-tailored and virtual-first products, grew by 350,000 people over the past year. 

Particularly impressive here was the data point shared on the individual exchanges, that 90% of newly enrolled members selected plans with significant virtual components, and 30% of new members selected a virtual-first offering. That is an incredible uptake of virtual-first plans, and is a reminder of how UHC can use its scale to drive the adoption of innovative offerings. 30% of members selecting a virtual-first offering is something I think most of us would expect to see from an Oscar, not a UHC.

Nearly 90% of newly enrolled people in our individual exchange offerings selected plans with significant virtual components in the most recent open enrollment period, and nearly 30% selected a virtual-first offering.

Of course, the individual markets are known as one of the price sensitive markets, and so it’s not as surprising to hear UHG has had such high uptake in virtual-first plans when coupled with this second point made:

Reason 2: Virtual-first plans are a lower priced product

UHG also shared during the earnings call that its virtual-first products are priced 15% lower than other products in-market:

We've also done things we've talked before about getting really some good products in the marketplace, like our virtual products, which are 15% lower than other prevailing products in those markets.

So long as actuaries are willing to price virtual products at 15% lower than traditional insurance products, it seems like we’re going to continue to see this product offering continue to boom.

As always, it’s interesting to note what is and isn’t discussed during earnings calls, and it's worth noting what wasn’t discussed as it relates to virtual-first plans - member experience and clinical outcomes. While I imagine UHG leadership would tell you that improved clinical outcomes are naturally assumed as part of the offering and are necessary to drive reduced costs, it’s not mentioned in the earnings call.  Of course, it’s still the first quarter so there’s not going to be much to report in terms of clinical impact, so it’ll be worth watching what UHG shares in the future. Meanwhile, what is discussed is how virtual offerings are driving volume and resulting in improved pricing. I think that sheds a lot of insight into how payors are viewing the benefits of virtual plans.

Takeaway 5: The core commercial business declined

UHG shared in earnings that commercial lives under management declined in Q1 from 26.58 million at YE 2021 to 26.41 in Q1 2022, driven by three customer transitions. Losing three large accounts historically has been a big deal for core insurance business, indicative of how hard the employer insurance market is at the moment. Of course, it doesn’t even come up in analyst questions that are so focused on other parts of the business.


Earnings Transcript.

Press Release.