COVID-related medical costs may weigh on UnitedHealth’s performance this year

The health insurance sector has been facing multiple challenges from the virus crisis, but market-leading healthcare firm UnitedHealth Group (NYSE: UNH) maintained stable financial performance as customers of its core insurance segment deferred major therapeutic procedures due to safety concerns. But the trend is changing, with people returning to clinics and healthcare facilities encouraged by the vaccine rollout and improvements in the COVID situation.

A Good Bet?

Earnings of the Minnetonka, Minnesota-based company have beaten estimates consistently for several years, underscoring the effectiveness of its business model. Not surprisingly, the stock continues to be an investors’ favorite, thanks to the handsome returns and growing dividend. Currently trading a tad below last week’s peak, the stock looks poised to gather further steam this year and cross the $400-mark. The majority of experts following the stock recommend buying it, with a target price that represents a 12% upside.

The continuing innovation in healthcare programs, to better serve communities and individuals, helped UnitedHealth generate decent revenues despite the pandemic affecting the majority of its commercial customers, leading to business closures and job losses. That said, the road ahead looks rocky for the company, given the disparity in claims-processed and premiums-collected. Going forward, the company could face multiple risks, including those related to the dismal labor market conditions and growing stress on the healthcare system.

New Care System

Currently, UnitedHealth executives are planning to lead the development of the next-generation healthcare system, with focus on connectivity, data, and personal approach. They look to expand the Group Medicare Advantage and Dual Special Needs Plans to a record number of people this year and leverage the growing popularity of the programs among seniors, due to the positive health outcomes and low costs. Also, efforts are on to lay down a strategy that aligns with the growing demand for in-home care, a trend that picked up pace after the virus outbreak.

“We continue to make important advancements and strategic investments to lay the foundation for the next generation health system. Over the last many years, you’ve heard us discuss our ambition to build high-performing systems of care including an aim to reinvent healthcare delivery, which is the first of our five strategic growth platforms. The foundations for those efforts are in our primary and multispecialty care practices. OptumCare entered 2021 with over 50,000 physicians and 1,400 clinics,” said UnitedHealth’s CEO Dirk McMahon while addressing analysts at the post-earnings conference call.

Q4 Profit Falls

An 11% increase in operating costs impacted margin performance in the fourth quarter, resulting in a 35% plunge in adjusted earnings to $2.52 per share. On the other hand, revenues moved up 7% year-over-year to $65.5 billion, helped by strong contributions from all four business segments. Both the numbers exceeded Wall Street’s prediction. The bottom-line was particularly affected by an increase in medical costs, which rebounded after falling in the earlier quarters when patients delayed elective medical procedures amid safety concerns.

Read management/analysts’ comments on UnitedHealth’s Q4 results

UnitedHealth’s shares climbed to an all-time high last week, before retreating and settling slightly above $350. They have gained 21% in the past twelve months, all along outperforming the industry.