This article is about how UnitedHealth makes money. Firstly, we present our analysis of UnitedHealth business strategy and its impact on UnitedHealth Business Model. Then, we explain the business segments of UnitedHealth and how the company generates revenue from each of those segments. Finally, we share the revenues, the profits, and the profit margins of UnitedHealth for 2014.
The UnitedHealth Group (“UNH”) is a leading diversified health and well-being company that provides health benefits and health services through UnitedHealthcare and Optum business segments. UnitedHealthcare provides health benefits services to individual consumers, governments, and employers of all sizes. Optum offers health services to diverse stakeholder groups that include individuals, employers, governments, healthcare providers, payers, and life sciences companies.
UnitedHealth Group Business Model Evolution
Founded in year 1974, UnitedHealth group today has become one of the world’s largest diversified healthcare company. Over last 41 years it has evolved its business model from pure play payer business to providing premium business services to all the stakeholders in healthcare ecosystem. UnitedHealth group has introduced multiple innovations in its product and service portfolio to generate sustainable revenue sources. Following strategic objectives guide UnitedHealth Groups diversification and revenue generating approaches.
UnitedHealth Group Focus On Reducing Cost Of Providing Health Benefits And Its impact On Revenues
Healthcare Insurance companies (XLV) work as an aggregator. XLV aggregate the members (individuals, employers and government agencies) in need of healthcare insurance plan and sell health benefit plans to these groups directly or through brokers.XLV generate revenues by collecting at risk premium from these members. XLV bears the medical cost to treat the patients and administration cost to manage the health benefit plans. XLV offer the managed care services as Health Maintenance Organizations (HMO), preferred Provider Organizations (PPO) or Point-of-Service Plans (POS). HMO offers services through network of Primary Care Physician (PCP). Patients are referred to pre identified specialist by PCP in case specialist treatment is needed. Members have to pay all or most of the cost of the treatment if they directly want to meet a specialist not in the HMO plan network. PPO plans on the other hand have developed contracts with a network of preferred care providers. Members can directly go to a specialist. Members can also go to out of the network specialist by paying small percentage of coinsurance. POS plans are the hybrid plans that offer the advantages of PPO but are managed by PCP. UnitedHealth Group that started as an HMO, has built a vast network of preferred care providers. Due to its large membership it has used economy of scale to negotiate better medical care rates with care providers. This strategy helped it reduce the medical cost and offer competitive plans to its members. To further reduce the medical cost it started working as a Pharmacy Benefit Management (PBM). As PBM it has the power to negotiate the prescription drugs prices directly with the pharmaceutical manufacturers. It also entered into preventive health and wellness space to further reduce the medical costs. By offering wellness solutions, preventive health checkups and disease awareness it aims to reduce the disease burden on patients, thereby reducing the need to visit the doctors.
UnitedHealth Group Focus On Improving Quality Of Care And Its impact On Revenues
Healthcare globally is witnessing a shift towards patient centricity. Patients are asking for quality care that requires care coordination across healthcare entities. Healthcare technology offers a great solution to meet the patient’s expectations and provide quality care at affordable price. For years UnitedHealth Group was using technology to streamline its operations and provide innovative products and solutions to its members. To meet the emerging need of technology assisted, analytics driven care, UnitedHealth Group started offering business services through its Optum business segment. Optum offers healthcare technology, data analytic and consulting services to all the stakeholders in the healthcare ecosystem.
How UnitedHealth Group Makes Money?
UnitedHealth Group operates its business through UnitedHealthcare and Optum segments.
How UnitedHealthcare Business Segment Makes Money?
UnitedHealthcare offers health benefit plans and administrative services only plans to Employer & Individuals, Medicare & Retirement Program, Community & State Program and United Healthcare Global. It distributes its plans through professional employer organizations, associations, private equity relationships and, increasingly, through both multi-carrier and its own proprietary private exchange marketplaces. The following diagram shows the key elements of UnitedHealthcare revenue model. It shows how the money flows-in from the different customer segments and the key cost elements where the money flows-out to.
How Optum Business Segment Makes Money?
Optum segment offers collaborative care, population health management, healthcare technology, technology, Pharmacy Benefit Management, analytics, consulting and administrative services to care providers, health plans, government entities and life sciences companies. It reaches out to its customer segment directly. The following diagram shows the key elements of Optum revenue model. It shows how the money flows-in from the different customer segments and the key cost elements where the money flows-out to.
UnitedHealth Group Business Segments
The firm reports its activities in four business segments: UnitedHealthcare and Optum. A brief description of these four business segments is as follows:
UnitedHealth Group FY 2014 Revenues By Business Segments
In FY’14 (fiscal year ended December 31, 2014), UnitedHealth Group generated $130.5 billion of total revenues (from external customers) from UnitedHealthcare and Optum segments. Of these total revenues, UnitedHealth Group generated
UnitedHealth Group FY 2014 Profits And Profit Margins
Of the $130.5 billion of UnitedHealth Group total revenues in FY’14, $120.2 billion were the total operating expenses. These include $93.2 billion of medical costs, $21.7 billion of operating cost, $3.8 billion of cost of products sold, and $1.5 billion of depreciation and amortization. Medical cost include hospital and medical benefits, emergency room charges, professional fees, prescription drug charges and outside referrals. This resulted in $10.3 billion of operating profit and an operating margin of 7.9%. After income taxes and other, UnitedHealth Group had a net profit of $5.6 billion and a net margin of 4.3%.