Is UnitedHealth A Good Buy Despite Recent Regulatory Noise?

Shares of UnitedHealth Group Inc. (NYSE:UNH) have declined recently following the proposal from the White House to lower drug prices and the Medicare-for-All bill that was submitted in late February.

The stock has declined nearly 3.5% since Feb 27, when the Medicare-for-All bill was presented to the House of Representatives.

Regulatory Developments Concerning UnitedHealth

Medicare-for-All

The Medicare-for-All bill seeks to implement a single national plan that will be looked after and funded by the Federal government.

This bill is of concern to Medicare Advantage heavyweights like UnitedHeath Group, Humana Inc. (NYSE:HUM) , WellCare Health Plans Inc. (NYSE:WCG) as the Medicare-for-All policy might replace the private health insurance plans offered by these players, thus draining their business.

Drug Price Rebates

Another concern for UnitedHealth has stemmed from the decline in drug price rebates received from pharmaceutical companies, after these have come under intense pressure to lower prices.

UnitedHealth owns its Pharmacy Benefits Management (PBM) business, named OptumRx, which negotiates and manages drugs (with pharmaceutical companies) required by its members. The PBMs get discounts or rebates from drug companies, which is passed on to insurers and then to consumers.

Any cut in drug prices would imply lower revenues for OptumRx, and consequently lower earnings for UnitedHealth.

Near-Term Likelihood

Market participants are of the opinion that Medicare for All will not be easy to implement. The plans entails huge burden on already constrained Federal budget deficit.

Alongside, it is also being said that the bill has little chances of passing through the Senate committee, which is controlled by Republicans, who are opposed to this bill.

Also, Trump’s proposed regulatory change would end the practice of PBM rebates in the Medicare and Medicaid programs as of Jan 1, 2020. However, players having PBM business have been proactively moving their business away from the rebate model and therefore the rule if implemented would not do much damage to UnitedHealth.

Does the Stock Look Attractive?

These legislative noise has pulled down the stock of UnitedHealth, which lost nearly 10% of its value in the last six months, almost in line with the industry’s decline. Thus the stock offers a good buying opportunity.

The company, with its massive business size that offers economies of scale, solid balance sheet and expanding international business, is poised to grow over the long term.

The recent weakness in the stock has made it attractively valued. The stock is trading at the 12-month forward price-to-earnings ratio of 16.13X which is near its low level of 15.8X and lower than median level of 18.4X.
UnitedHealth carries a Zacks Rank #2 (Buy).

Another stock worth considering is Anthem (NYSE:ANTM) Inc. ANTM, with a Zacks Rank #1 (Strong Buy). The stock has surpassed earning estimate in each of the four quarters with an average positive surprise of 7.04%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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