UNH - United Health

[shalab]

United health is a large health care company serving more than 75 million people worldwide. The company has survived the health care reform and has thrived. Berkshire had a position in this company and it still looks pretty cheap. The dividends are good (increased recently) and the health care costs continue to increase in the US faster than GDP.

 

[biaggio]

Shalab,

 

My biggest holding, so be careful.

 

To quote Bruce Berkowitz:

 

 

” To kill the HMOs, you just have to answer the following question:Who would do what they’re doing if they weren’t doing it?” Th e big issue with HMOs is a radical restructuring of the healthcare system and whether or not someone else can do what they are doing, or whether they can be forced to do it at much lower prices. By studying the industry and the participants, you can come to the conclusion that the only thing the government can do is cut a check. And every time they’ve tried to run a healthcare system by cutting checks, such as with Medicare, the costs just escalate the HMOs have become gatekeepers and they do it for reasonable prices. Th ere is no other organization or other industry that we believe is a competitive threat, and there are no other people that have the scale or skills by which to carry forth the future healthcare system, whether it is universal health or corporate healthcare policies. So when we are trying to kill an HMO, the first question that we address is the obvious issue of how they can be pushed aside, and our answer is that we can’t find any way to kill them from a competitive or regulatory threat. Once you get to that, then you can say that these companies have had really poor capital allocation policies in the past. Th ey have spent billions of dollars buying their stock back at two times or three times current prices. Th e only conclusion that we can come to there is that it wouldn’t be a mistake for them to do that today. Most likely they are all buying their stock back. So if the HMOs— United Health, WellPoint , and others—are not going to manage the healthcare system, then who is? And I can’t find an answer to that. I can’t find an alternative.”

 

 

Considering the positive demographics + the resulting need for cost containment + its size (the largest network of physicians, hospitals,data) + despite legislation (I think it will be hard to completely kill it, as the government will need them) + probable future consolidation =I think it is worth ~$70-80 (based on $4.49/share of FCF growing at 7% x 5-10 years and 10% discount rate).

 

There is a whole lot of negative sediment. I don t expect that there will be any new competitors. I note some bigger general insurance company selling off (or giving it away to UNH) their health insurance business recently (I forget who that was).

 

All the HMO's have been able to pass substantial increase in premiums over the last several years. They appear to have been in the "hard" market that everyone talks about. I know this won t last forever.

 

Appreciate others opinion on this.

 

Shalab, thanks for posting.

[ExpectedValue]

Maybe Bruce managed to kill it, after all he doesn't own the stock anymore.

[biaggio]

Maybe Bruce managed to kill it, after all he doesn't own the stock anymore.

 

Yes that is true, though price has appreciated(I know that does not mean anything short term) since he sold out to go heavy into financials (apparently he like AIG, BAC, C etc better or maybe he does not like the HMOs at all anymore. I am hoping that it is not the latter. I recognize that I could be wrong).

 

Thanks.

[biaggio]

Apparently street liked earnings report out this am

 

Rev up 10%. EPS up 18 % .

 

Analysts underestimated earnings.

 

Not too many people like health care.

 

Does anyone else here like health insurance?

 

My estimation is that U.S. government needs the infrastructure of the HMO industry if they intend to carry out universal health plan.  So they need to be allowed to earn a couple % on cost to manage health cost.

 

I think UNH is worth $~70/share. 

 

Am I delusional in thinking that there could be a "network effect" with UNH. UNH=large network of doctors, hospitals, clinic, labs + large # of patients. If you re a patient it is appealling to buy UNH insurance as you get a lot of quality choice. If you re a doctor you want to be part of the network because that is where all the patients are.Is there an enduring competitive advantage here? It would be hard to duplicate what they have over a short period of time?

[Guest HarryLong]

To my way of thinking, UNH's excellent performance begs the question as to why Berkshire has never tried to acquire it......

[S2S]

To my way of thinking, UNH's excellent performance begs the question as to why Berkshire has never tried to acquire it......

 

My guess is that (1) the marketplace is still too fragmented for Buffett's taste, what's with 5+ plans in most states, private insurers together only account for 40ish% share leaving much in the hand of nonprofit Blues and Kaiser who are sometimes willing to price irrationally, and (2) regulatory risks can be massive, ie in Massachusetts where healthcare reform was enacted 3 years ago, plans have been losing money left and right.

 

Disclosure: we've been long UNH since the dark days during the height of the HC reform debate  ;D

[Bastida]

I like it too. Got it at $22 (wife's portfolio). I agree with the general sentiment: Regardless of big regulatory changes, someone has to do the job. Why not the guys who already know how to?

 

Regards,

Bidatzi M. Bastida.