UnitedHealth Finishes 2016 Strong, Has High Hopes for 2017

By Dan Caplinger Markets Fool.com

2016 was a momentous year for the healthcare industry, and few expect anything different for health insurance giant UnitedHealth Group (NYSE: UNH) in 2017. With massive changes to healthcare laws likely to come in the very near future, UnitedHealth will have to work hard once again to adapt to new requirements while trying to serve its current clients seamlessly. Coming into Tuesday's fourth-quarter financial report, UnitedHealth investors wanted confirmation that the insurer would be able to deliver solid gains in revenue and earnings, and UnitedHealth delivered on that front. Moreover, the company seems quite optimistic about its ability to keep growing in 2017. Let's look more closely at UnitedHealth and its plans to keep dominating the health insurance industry.

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Image source: UnitedHealth.

UnitedHealth sees profits soar

UnitedHealth's fourth-quarter results gave investors what they wanted to see. Revenue was up 9% to $47.5 billion, which was slightly better than the 8% growth rate most investors following the stock were looking for from the health insurer. Net income soared 56% to $1.90 billion, and after allowing for some extraordinary items, adjusted earnings of $2.11 per share topped the consensus forecast among investors by $0.04 per share.

Looking more closely at UnitedHealth's numbers, the insurer once again surprised those who've followed the company for a long time by posting stronger growth from its UnitedHealthcare insurance unit than its Optum division. Revenue at UnitedHealthcare during the fourth quarter jumped more than 15%, while Optum revenue inched upward by just over 1%. In particular, OptumRx revenue actually shrank 5% during the quarter, and gains from the smaller OptumHealth and OptumInsight divisions were just enough to keep the overall Optum business from seeing its top line fall. Moreover, UnitedHealthcare operating earnings jumped more than 80%, compared to just an 18% rise at Optum. However, when you look at full-year numbers, Optum's growth advantage continued to shine through, with the company citing strong organic growth and strategic investments for the gains.

Within the insurance segment, UnitedHealthcare's gains came from across the board. The Medicare and retirement division saw the biggest overall gains in sales, but the employer and individual division and community and state business also posted gains of more than $1 billion each on the top line. The global division continued to drive the company forward with the best percentage gains as revenue climbed more than 40% from the year-ago quarter. Customer counts rose to nearly 48.6 million, with very similar contributions from all business sources.

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UnitedHealth CEO Stephen Hemsley was pleased with the results. "We are privileged today to serve more people in more ways than ever before," Hemsley said, "and we know further growth in 2017 and beyond rests on continuing to drive ever-higher quality and increasing value to consumers, care providers, and customers."

How does 2017 look for UnitedHealth?

Investors also got good news in the form of favorable guidance for 2017. The health insurance giant expects to post 2017 sales of between $197 billion and $199 billion, which would work out to a growth rate of between 6.5% and 7.5% compared to how 2016 finished. Adjusted net earnings guidance for between $9.30 and $9.60 per share will compare favorably to 2016's $8.05 per share, equating to 15% to 19% bottom-line growth.

One thing investors will want to keep looking at is how UnitedHealth responds to further healthcare reform efforts in Washington. The company already announced that it had reduced its offerings to the individual market, and it expects it will serve about 1 million fewer customers as a result of its moves. UnitedHealth has in the past noted the downward pressure its insurance-marketplace policy offerings have had on profits, so changes to or the full repeal of the Affordable Care Act could well be a net positive for the company. Until details are available, though, it will be tough for investors to anticipate the net effect of future law changes.

UnitedHealth shareholders were modestly positive about the news, sending the stock up by a bit less than 1% in pre-market trading following the announcement. Now that 2016 is in the books, it will be interesting to see how UnitedHealth responds to dramatic changes in the months ahead.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.