UnitedHealth Group may not be on the hunt to acquire a rival, but when the nation's largest insurer kicks off earnings season for the health insurance sector on Thursday, industry consolidation will be a big topic for analysts and investors.
"Obviously, we'll ask questions about the deals, and I suspect management won't be able to comment on it," said David Toung, health-care analyst with Argus Research.
Near term, it's health-care cost trends that he's concerned about.
When Aetna announced it had reached a $37 billion agreement to buy rival Humana, the news was accompanied by an earnings warning at Humana, the leading provider of Medicare Advantage plans. Higher-than-expected hospital costs among its senior citizen members, had hurt its bottom line.
"One of the things I'm looking for is what's happening with utilization," Toung said, referring to the extent to which members are using medical services. He wants to know whether United and other insurers are seeing the same increase in hospital usage as Humana.
"Fundamentals still matter amid merger mania," Leerink analyst Ana Gupte wrote in a research note to clients. She expects that the Medicare Advantage cost issues are specific to Humana and its pricing on the senior health plans.
"Pricing has been conservative, utilization stable, reserve strength is at a historically conservative high," for most of the other leading insurers, Gupte said. She expects UnitedHealth, Aetna and Anthem to post strong profits in the senior health-care business.
United is expected to report earnings of $1.58 per share and $35.6 billion in revenue for its second quarter. Over the last three years, Factset data show the insurer has posted its largest upside surprise to analyst estimates in the second quarter.
Sterne Agee CRT analyst Brian Wright said he expects United could wind up being the biggest winner of the frenzied merger dance, by sitting it out. He thinks the nation's largest insurer will gain market share while its competitors are distracted trying to win approval for their deals. Aetna and Humana will likely have to address their overlapping businesses in some Medicare Advantage markets.
"In order to get approval from the [Department of Justice], we estimate that Aetna will probably have to divest 500,000 Medicare Advantage lives," Wright said, "which would be about 13 percent of the combined company's membership."
Argus' Toung doesn't buy the distraction theory.
"I'm not putting a lot into Humana and Aetna being so distracted they're going to lose market share," Toung said. "It's possible they're already taking corrective action."
But Wright said it's the size of the deals that could prove a problem. Anthem is reportedly still in pursuit of Cigna, after the latter rejected a $54 billion merger bid last month. One of the issues that has held up a deal is disagreement over who would lead the combined company. Together, they would be the nation's largest health insurer ever, with over 50 million members.
"Given the size of the transactions that are being contemplated and proposed, the operational and execution risk is greater than we've ever seen," Wright said. "I think the degree of difficulty in integrating these sized acquisitions is greater than what we've historically seen."
Beyond its own business, investors will likely press United about its pending $12.8 billion acquisition of pharmacy benefit-management firm Catamaran.
Analysts have speculated that a potential link between Anthem and Cigna could negatively affect Catamaran's business. More than a third of Catamaran's revenues come from Cigna—by far its largest customer.
Until now, United has not commented on the potential impact.