UNH 3Q is less about MLR, more about PBM

Richard
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UNH plainly intended to subdue 2012 EPS expectations in their 3Q release, and the market seems to have read this through to other HMOs’ earnings prospects. We suspect this read-thru is incorrect

Systematic earnings pressures for HMOs tend to take several forms; of immediate relevance is whether UNH’s downbeat 2012 outlook foreshadows MLR compression. We believe it does not

We’ve shown elsewhere (see here) that MLR peaks and troughs almost always are the byproduct of 2nd-derivative changes to medical prices and/or employment. For 2011 to be a trough, we would have to believe in either or a combination of accelerating input costs or accelerating unemployment, and neither expectation is realistic. Instead, we see the MLR trend as stable. UNH made clear that pricing pressure in commercial risk was geographically (CA) narrow, and primarily due to the actions of one competitor (presumably WLP); and, that the competitor’s actions were the byproduct of state regulatory pressures as opposed to national trends

All in, we continue to see HMOs as attractive, specifically because we believe the MLR trend is stable, and the market appears to price in the opposite conclusion

UNH has for some time signaled an intent to expand its offering of PBM services, but today’s release hits this note a bit harder, and more clearly, than before. We suspect the related investments may have more to do with 2012 EPS pressure than MLR. And, we note that UNH’s intention to re-integrate pharmacy and medical benefits is consistent with our broad expectation for HMO service offerings over the next several years, and we believe this trend will unfold very much at the expense of PBMs (see here)

 

 

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