Today's post is the first of a new series we're launching on key players in healthcare vertical consolidation. And that's because nearly everyone in healthcare will come into contact with these orgs. Often, in fact. They are your customers, your acquirers, your competitors. But in many people's minds, they often occupy that same paradoxical space as the U.S. government: simultaneously omnipotent and incompetent, against whom resistance is futile, and yet also lumbering and inflexible. But does that paradox reflect reality? This series aims to show these giants for what they are—where they are true juggernauts and where they are paper tigers. Today, we're starting with the biggest behemoth: UnitedHealth Group, the organization that industry insiders would most associate with the trend of vertical consolidation, and that arguably set the current wave of vertical consolidation into motion. We'll break down UnitedHealth Group's approach to vertical consolidation in more detail, and we'll share our read on their aims—and execution—to date.
This case profile (as with all others in the series) is broken down into five parts—and you can use the links below to advance directly to any section(s) of interest:
Topline summary: Summary of each organization’s current approach to vertical consolidation
Org structure: Major business units and revenue lines, including notable (non-exhaustive) brands within each
Recent news: Major organizational developments (related to vertical consolidation) as of mid-2024
Union's analysis: Our read on the type of strategies most at work within each org (portfolio, flywheel, platform). For background on this, read our previous blog post on vertical consolidation.
Open questions: What to watch for in the coming months and years; developments that could shift our take
Topline summary: UnitedHealth Group's approach to vertical consolidation
UHG is the market leader in vertical consolidation, having amassed a diverse portfolio that spans nearly every industry sector, with the notable exception of hospitals. Many UHG-owned business derive significant revenue from one another, underlining the importance of the flywheel strategy to UHG. But growing regulatory scrutiny, on top of immense operational complexity, has precluded UHG from seriously embracing a platform approach. The closest it has come has been (limited) narrow-network UHG products designed around the OptumHealth provider network.
Org structure: UnitedHealth Group
With the largest health plan in the United States (UnitedHealthcare, or UHC for short), and an enormous health-services business segment (Optum) UnitedHealth Group is the fourth largest company in the country.
Despite historically being known as an insurance company, UHG's revenues are actually relatively well-balanced between its insurance and non-insurance business lines: $281.4B for UHC and $226.6B for Optum in 2023. (If you're wondering why those numbers far exceed UHG's total revenue number of $371, it's because Optum and UHC exchange a staggering amount of intra-company transactions—more on that in a minute).
Optum's revenue contribution is particularly notable given that the subsidiary was formed out of disparate assets less than 15 years ago, in 2011. While UHG had acquired some non-health-insurance assets in the early 2000s (primarily in the PBM and healthcare banking spaces), the push to grow Optum in earnest primarily took place across the 2010s.
Optum itself is divided up into three smaller business units: OptumHealth, its care delivery arm, OptumRx, the third largest PBM in the country, and OptumInsight, comprising various consulting and technology services, including Change Healthcare. Of these three, OptumRx is the biggest revenue contributor, with OptumHealth not far behind.
Recent news: Developments in UnitedHealth Group's vertical consolidation strategy
The Change Healthcare hack has only intensified scrutiny on the size and scope of UHG's portfolio (in addition to the level of consolidation with the clearinghouse industry—Change's wheelhouse—specifically).
Adding fuel to the fire, it was revealed days after the hack that the DOJ is conducting an antitrust investigation into some aspects of UHG's businesses practices, including the potential for anticompetitive practices between the plan and provider segments, and the impact that this could have on MA risk coding.
Also of note was the announcement in April 2024 that Optum would be shutting down its virtual care arm, which was launched in the wake of the pandemic. This news joined a chorus of headlines about plans and retailers sunsetting various alternative primary care models. For our take on those closures, see this post.
Amid these challenges, the business took a financial hit in Q1 of this year. However, recent Q2 earnings were strong, beating expectations, due largely to strong performance of OptumRx and OptumHealth.
Union's analysis: Our read on UnitedHealth Group's approach to vertical consolidation
Portfolio strategy: Very significant emphasis
Diversification has been a clear cornerstone of UHG's strategy since the 2011 establishment of the Optum subsidiary. The fact that Optum's revenue has even come close to rivaling that of the UnitedHealthcare segment demonstrates that UHG has been successful at achieving a significant degree of diversification.
As the Optum portfolio has grown, the company has also been clear about its intent to maintain strict separation between segments and intentionally forego deeper integration in order to secure regulatory approval for various deals—a clear signal of a true portfolio/conglomerate approach, as opposed to a more integrated strategy. The absolutely enormous amount of intracompany transfer payments underscores this. The fact that the company is willing to sunset entire brands (like Optum Virtual Care) that aren't performing financially suggests that the organization expects businesses to perform on their own, regardless of the effect they might have on other business units.
The net result is a huge portfolio of acquired assets that must sink or swim based on their own performance. On the one hand, this mean that any given unit's likelihood of outsized performance is low, but it also means that under-performers don't drag down the company for long.
Flywheel strategy: Significant emphasis
Sources suggest that as much as 40% of UHG's revenue could be attributable to internal transactions, suggesting that the company has built a series of effective flywheels that allow various business units to feed into one other.
One publicly-reported example is the relationship between OptumRx (the company's PBM) and UnitedHealthcare (the health insurance asset). The share of UHC enrollees using Optum RX has grown over time, as has the share of Optum RX’s revenues that are generated by UHC enrollees. In fact, UHC enrollees now account for a majority of OptumRx's business.
Over time, an increasing amount of scrutiny has been directed at the potential flywheel between UHC and OptumHealth, particularly when it comes to the overlap between UHC's Medicare Advantage health plan products and Optum's senior care assets. While some analyses have demonstrated a lack of significant geographic overlap between the two business lines, there are some geographies in which the two in fact do overlap. And scrutiny has reached the point where the DOJ is actively exploring the business practices between these two units.
Platform strategy: Moderate emphasis
As noted earlier, UHG has been careful to explicitly emphasize the lack of integration between business units in response to concerns about its dominance across an increasing number of healthcare sub-sectors. However, it has also, at times, underscored the potential for some limited types of integration to create a more seamless, high-quality experience for consumers.
The only concrete, public example of this to-date appears to be the company's Harmony health plan offering in California, which is a UHC health plan product designed around (although not exclusive to) the OptumHealth provider network.
Open questions about UnitedHealth Group's approach to vertical consolidation
Impact of ongoing (and intensifying) scrutiny: How consequential will the DOJ investigation, along with fallout from the Change hack, be? There is little recent/healthcare precedent for regulatory action on vertical consolidation once the companies are acquired. If the federal government acted, what approach could it take?
Plan/provider integration: Historically, OptumCare and UnitedHealthcare footprints have had only modest overlap, making a true platform approach difficult to pull off. Have recent provider acquisitions made more synergies possible? How has the Harmony offering in California performed?
Outlook for a portfolio approach: A portfolio strategy tends to be most effective when it balances businesses in counter-cyclical industries. However, the fortunes of the biggest healthcare sub-industries increasingly seem to rise and fall together. Does UHG have a diverse enough portfolio to truly use its businesses as a hedge to one another?
Parting thoughts: UnitedHealth Group's approach to vertical consolidation
UHG is a portfolio company that also built a number of strong flywheels, but in the end, it has to grow by acquisition because organic growth to the level the market demands is unlikely. That’s partly because of its sheer size, but also because:
Resources appear to be relatively evenly spread across business units; as a result, no one unit will tend to have outsized performance. That’s a great hedge against losses and a solid recipe for steady growth, but not sufficient (on its own) for the level the market demands.
Like any large public company’s statement about major M&A deals, UHG’s external rhetoric around the value of its portfolio strategy and the benefits of potential integration (or in some cases, the intentional lack thereof) can largely be thought of as a strategy to address regulatory hurdles. It’s clear that the portfolio strategy reigns supreme. That said:
The ongoing challenges with MA profitability militate in favor of deploying more integration among its health plan, PBM, and provider network to improve overall MA performance over time. They may have to be more platform-oriented, despite the immense difficulty in pulling this type of strategy off.
Want more on vertical consolidation?
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Read our blog post on the various forms that vertical consolidation can take
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