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Stock Analyst Update

UnitedHealth Results In-Line With Expectations

We are reiterating our fair value estimate and narrow moat rating for the managed-care firm.

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There were no major surprises for  UnitedHealth (UNH) during its second quarter, and we are reiterating our $190 fair value estimate and narrow moat rating for the managed-care firm. UnitedHealth reported a 7.5% overall operating margin, which remained flat from year-ago levels, as a slightly lower medical loss ratio was offset by a slightly higher operating cost ratio. While the lower medical loss ratio is a positive, we expect this trend to reverse over the the next several quarters as utilization rates start to tick up due to a continuing mix shift toward higher-cost Medicare and Medicaid. For the quarter, employer- and commercial-based membership decreased 2% year over year, while Medicare/Medicaid membership increased 6% over the same time period.

From our perspective, we believe secular growth trends within the health insurance market will largely be driven by the higher-cost Medicare and Medicaid cohorts. The members that make up this risk pool tend to skew older and sicker, and thus, usually carry a materially high level of medical costs. With this shift in membership growth, we believe it’s essential for United to control its operating costs.

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Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.