UHG's Q2 2022 Earnings Review

Link (earnings transcript) / Link (earnings release) / Link (HTN’s Q1 earnings perspective)

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Last Friday, UHG announced Q2 2022 earnings. It was another quarter of solid growth for UHG, which raised earnings outlook for the year. UHG’s flywheel continues to spin in overdrive as virtually every element of the organization discussed during the call seems to be humming along nicely. Let’s take a look a few things we learned in the call:

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Senior care priorities: experience + moving home

This was an interesting Q&A about UHC’s priorities for senior care, highlighting two themes - improving consumer experience and moving care into the home:

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Q: As you look at the senior market over the next couple of years beyond the obvious primary care services that you're building out, are there other capabilities that you think you need to develop or acquire things that are now emerging in the market that you think are going to be even more important in the future?
Tim Noel: [...] Dirk talked about the UCARD, which is something that makes our benefits easier to use, more simple for members to understand on and experience. But beyond that, we'll continue to bring forth consistent innovations that make the member experience easier for people. Things like the digital experience, more personalized member experiences as well.
I think another theme for the senior population will continue to be to -- on expand at-home services. That's really important. I think we've historically thought of the center of care for seniors to be in the physician's office. More and more, though, that's becoming something that needs to occur out of the home given mobility channels, challenges for folks, the vulnerability of this population, bringing care into the home is absolutely essential to the delivery of high-quality care.
So those are the big themes. For me, looking forward is continue to advance the at-home capabilities for seniors and continue to innovate, make using benefits easier, more understandable, simple, affordable.
Andrew Witty: [...] And I think the sense of urgency and depth of thinking around innovation for our senior members and where that service can go over the next several years is really substantive, and you should continue to see us be super active in that space.

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Certainly, given broader macro trends, these two themes shouldn’t exactly be surprising. Throughout the call, there’s a lot of dialogue about the changing consumer environment, and in particular the impact of inflation. UHG seems to think that it is well positioned to improve upon consumer experience by implementing products like UCARD as a key differentiator for customers. UHC announced during earnings that it will be rolling out the UCARD to all Medicare Advantage members in 2023. However it’s also worth noting that UHC didn’t mention anything about its recent decision to spin out Optum Store into a JV with Red Ventures, which seems to indicate some recognition of the challenges that lie in building consumer experience as a competency. While specific, tactical use cases for targeted populations (i.e. UCARD for Medicare Advantage members) seem doable, driving a broader change in consumer experience via something like Optum Store seems like a much larger challenge for UHG / Optum.  

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The commentary around moving care in home is particularly interesting here. With much of the activity in the space over the past few years centered around new in-office primary care models, UHC is seeming to move its sights beyond that and focusing on in-home as the center of care. While I can’t imagine we’re going to see them move away from physical clinics anytime soon, I would be surprised if we see UHG acquire any of the primary care clinic startups given this shifting focus. Instead, it appears they’ll be quite active on the in-home care front (which Witty doubled down on in the response as well saying they’ll be “super active”). We already saw a major move in home health with the acquisition of LHC Group in Q1, and it seems from the commentary here that activity isn’t slowing down. 

UHG is playing a long game with its provider acquisitions

Over the past few years, UHG has obviously been leading the industry trend of insurers acquiring provider organizations, which the broader markets are increasingly realizing is a nice way for insurance organizations to capture additional unregulated profit margin. Certainly we’ve also seen a number of other insurers follow suit with copy-cat models, including companies like Bright Health, who have been looking to acquire provider organizations. This activity prompted an interesting question from an analyst about how the broader market volatility is impacting these provider acquisition conversations. Here’s part of John Rex’s response below: 

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our pipeline and our conversations as we expand in care delivery, these are multiyear conversations that we have. Often by the time we are able to partner with another care delivery organization, we've probably been in conversations with them for 5 years. Super long pipelines, development processes, relationships, understanding the organization.
‍So with that perspective there, there's probably a little bit less volatility than you might expect in terms of as we pace out and we think about valuations in this business and where we would have stepped into it maybe a number of years ago where we are now. And even if you look towards a public market and such, this just don't manifest quite as quickly. But they also kind of on the other side, they weren't manifesting as quickly. So I would call it a little less impactful at this point and juncture, but the key point that I think we focused on is, these have been multiyear conversations and relationship builds for us as we move into these, and typically not a 6-month process.

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It’s certainly interesting to see that UHG views provider acquisitions – like Kelsey-Seybold and Atrius – as the culmination of a five year relationship, rather than a six-month process. This commentary shines a light on the depth of UHG’s advantage in this space compared to other players executing this strategy. It is one thing to be the new player, raise a pile of money, and quickly spend all that money being the highest bidder for provider groups. It is another thing entirely to build long term relationships with these provider organizations that eventually culminate in acquisitions after years of dialogue. The latter seems to be a much more long term viable strategy, while the former appears to be at risk with changing market conditions. Considering this, we should probably expect to see this acquisition activity continue. 

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Further, it is pretty remarkable that UHG deployed more than $7 billion on acquisitions in the first half of the year. However, it is worth remembering that UHG kicked off $6.9 billion in cash flow from operations during Q2 alone, and it expects to generate full year cash flow from operations of $24 billion. That’s a lot more cash that can be used for acquisitions moving forward. Here, you can see UHG’s massive flywheel at work –  acquire cash flow positive businesses, consume the cash flow from those businesses, and use that to acquire more cash flow generating businesses. It’s a playbook that allows you to have a very patient, long term view as described above, and it’s also an approach that seems unstoppable (aside from regulatory intervention).

The metrics behind UHG’s move to VBC remain unclear

Analysts continue to ask questions each quarter – such as the following – trying to get a better understanding of the growth opportunity with acquiring providers and flipping them to VBC:

Q: How [do] you think about the ability to continue to add doctors at this rate, the competitive landscape? And how should we think about where the margin and the capitated physician business compared to Optum Health broadly and where that segment could go over time?

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While UHG leadership has recently made comments about sharing more data relating to how it measures performance here, the response is still pretty underwhelming. UHG shared that it is still tracking on adding 10,000 new physicians this year, that Optum Health should deliver 8% - 10% margins, and that UHG is in the “third inning” of building care delivery capabilities. While that last item should terrify health system leaders across the country, the first couple items are pretty underwhelming responses to the analyst’s question. This has been a trend for UHG over the last several earnings conversations, as noted in our previous analysis of UHG’s 2021 investor day and Q1 2022 earnings. It will be interesting to see if UHG starts sharing more data here moving forward.

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Other public companies in the VBC space are sharing significantly more in terms of the progress they’re making in managing both cost and clinical outcomes in populations. For instance, Oak Street and agilon both consistently share with analysts how their model is driving improved outcomes over time, providing insight into how different cohorts have been performing and showing consistent improvement in those cohorts. Granted, they are smaller businesses so naturally analysts are going to want to understand the mechanics better, but you have to imagine at some point UHG is going to need to provide more clarity here on how this shift to VBC is actually working. 

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So long as UHG is kicking off as much cash as it is, it seems like they will have a long leash with Wall Street. But at the end of the day, it is a really hard task to move providers from FFS to VBC contracts and then have them consistently perform well in those VBC contracts. A more granular look at performance here might surface more warts in the business. We’d expect UHG will resist setting expectations over here for as long as they can. 

UHG’s venture arm, Optum Ventures, is not immune from the broader investment market downturn: 

An analyst made note of UHG’s lower Investment and Other Income revenue line this quarter, resulting in the following exchange during the earnings call:

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‍Q: I would have thought that investment income would have been a little higher this quarter. Were there any write-downs on Optum Ventures, anything that would negatively impact that? Just wondering how you're marking some of those investments that you've made in recent years.
A: Yes, within the quarter, we actually took -- we realized some losses as we reposition the portfolio a bit here, looking out to the future, try to get that all teed up for the environment we're in right now. And so when you look at that, the quarterly progression, which I believe that's what you're focusing on, I'd call it some of the realized losses we chose to take in this quarter.

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Optum Ventures has amassed a pretty impressive portfolio of digital health startup investments over the past few years, which includes well known digital health startups such as Dispatch, Truepill, and UniteUs among many others. It’s not necessarily surprising given the broader market downturn that UHG decided to realize losses in the Optum Ventures portfolio, but it is worth keeping an eye on for Optum Ventures moving forward. UHG historically has not been known to give “innovation” efforts a long leash, particularly when those initiatives have a negative impact on earnings targets and raise analysts’ eyebrows on earnings calls. You’d imagine UHG is a relatively influential LP in Optum Ventures fund, so given how Optum Ventures has been investing in venture-style businesses that don’t really fit into UHG’s broader cash-flow centric flywheel, it will be interesting to see how Optum Ventures investment activity is impacted moving forward. 

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A couple other notes:

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1. UHC membership grew by 280k members in Q2, with the commercial business increasing in Q2, bouncing back after a decline in Q1. Medicaid alone grew by 180,000 members, and UHC doesn’t expect redeterminations until 2023 at this point.
2. Optum Health revenue was again up 30% YoY driven by a shift to VBC and expansion of services offered
3. UHG announced during earnings that there will be no co-pays and $0 out-of-pocket expenses for a few key drugs - insulin, epinephrine, and albuterol. Seems like an astute consumer-oriented move for UHC.

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