is capitalizing on a new prescription for growth.
The giant managed care company has emerged as a clear leader in the rapidly expanding market for consumer-driven health plans. By July 1, the company expects enrollment in its consumer-driven plans -- including both health savings accounts and health reimbursement arrangements (HRAs) -- to top 1 million members. But some industry experts foresee more explosive growth ahead.
"We suspect that many on the Street have viewed the 'move to more affordable health plans' and the 'HSA phenomenon' as something nice but not terribly meaningful or important or, quite frankly, real," Fulcrum Global Partners analyst Sheryl Skolnick wrote earlier this month.
But, says Skolnick, "We argue that investors really need to understand this sea change in benefit products and the impact it will have on revenues, earnings and market leadership positions (and, therefore, valuations) for the health insurance group as it is real, large and could have a significant impact on results in 2006 and beyond."
Skolnick points to UnitedHealth as the "one stock to own for the trend of the changing product cycle." She also highlights
PacifiCare Health Systems
, which last year acquired another HSA leader, as an "interesting" company, although she has no formal rating on that stock.
Shares of UnitedHealth rose 40 cents to $51.19 on Monday, adding to their 60% jump over the past year. PacifiCare, which has rocketed 80% over that same period, climbed 12 cents to $65.04.
Just a year after HSAs became available, trade group America's Health Insurance Plans launched a Web site designed to educate the public about the new form of coverage. That Web site,
HSADecisions.org, received nearly 1 million hits during its first month on the Internet early this year.
The group pointed to that heavy traffic as clear evidence of keen interest in HSAs. By September 2004, some 438,000 people had already chosen HSAs linked to high-deductible health insurance plans. Since then, the group said, more and more companies have rushed out to meet rising demand for the new health plans.
UnitedHealth, through its purchase of two HSA pioneers, ranks as the biggest player in that group.
Earlier this month, UnitedHealth highlighted the popularity of the HSAs offered to individuals by its Golden Rule division. Just 18 months after HSAs became available, the company said, some 40% of Golden Rule customers are now choosing the affordable health plans over more traditional insurance.
"HSAs have moved into the mainstream," says Mike Corne, vice president of health products for Golden Rule. "Millions of hard-working Americans are looking for affordable health insurance coverage for themselves and their families, and we see interest rising as more consumers hear and learn about how HSA plans work."
HSA customers place money into a tax-exempt savings account to be used for health care services and then pay a low monthly premium for high-deductible insurance to cover any remaining needs. They retain any money left over in their accounts year after year and can maintain their same plans even when they change employers. The plans are designed to put consumers in control of their own health care spending and their utilization of health care services.
America's Health Insurance Plans (AHIP) recently highlighted HSAs as a resounding success. The group's latest study, released in May, showed that HSA customers had more than doubled over the previous six months alone.
"HSAs are steadily gaining momentum in the marketplace," AHIP CEO Karen Ignagni said. "HSA-eligible policies now fill an important niche for employers and individual purchasers."
The latest AHIP report -- coupled with Golden Rule's "under-the-radar" announcement of its own particular growth -- sure caught Skolnick's attention.
Indeed, Skolnick viewed the positive HSA data as nothing short of "stunning." Ultimately, she walked away from her research with a number of telling conclusions. First, she said, people do choose affordable health plans -- "and choose them at an accelerating rate" -- when they are available. Moreover, she said, a significant number of HSA customers previously had no health insurance at all.
This information "strongly supports our thesis that more affordable plans are growing from the ranks of the uninsured," Skolnick wrote, "not just from the replacement of existing insurance."
The AHIP study offered some other surprising findings as well. Notably, HSAs have attracted far more than just the young and healthy. All told, the study found, nearly half of all customers now covered by HSAs are over the age of 40.
Thus, Skolnick feels the so-called "young invincibles" -- who should find HSAs especially appealing -- still present a giant market opportunity. In fact, she notes, the entire population remains largely untapped.
So far, she points out, only a tiny fraction of the nation's 174 million commercially insured lives are covered by the new HSA plans.
Going forward, however, that small crowd could very well explode. Last month, Mellon's Human Resources & Investor Solutions division reported that the percentage of companies offering HSAs will more than quadruple -- to 32% -- over the next year.
"Small employers and individual consumers are leading the HSA charge this year," said Brad Engel, national health and welfare product leader for the Mellon's division. "But 2006 will see an explosion of HSAs, with many more large employers adding them to their benefits package."
Mellon is basing its predictions on a survey of more than 360 U.S. companies who employ, on average, 9,000 workers apiece.
Skolnick has highlighted rapid growth in that particular market already.
During a six-month span -- between September and March -- she says, the number of large group members reportedly covered by affordable health plans rocketed by 1,150%. Looking ahead, she says, most HSA administrators expect an even stronger performance next year.
To be sure, HSAs have already proven far more popular than similar experiments in the past.
"Only 40,000 medical savings accounts -- the precursor to HSAs -- were established during the first year they became available," AHIP stated last month. "And they failed to ever achieve the same level of market penetration in 10 years that HSAs have already achieved."
UnitedHealth, by itself, has already enrolled 325,000 people in HSAs and more than twice that many in employer-funded HRAs. Through last year's acquisition of HSA leader American Medical Security Group -- which had 270,000 customers at the time -- PacifiCare has emerged as a major player in the consumer-driven market as well.
Skolnick believes that the purchase of American Medical, which she calls her "favorite little company," has left PacifiCare well positioned for the future.
"The market is shifting towards affordable plans," she explained. "At least now, PHS has a viable, well-managed vehicle to play in this new game."
Still, Skolnick -- who has a buy recommendation and a $54 target price on UnitedHealth's stock -- feels that UnitedHealth will continue to lead the pack.
"The winners here are companies that have been doing this the longest and who are positioned to gain share in all three insurance markets -- individual, small group and large group," she wrote. "Integration with the HSA administrator is a nice touch. ... The only company that absolutely fits that bill is UNH."