By JEFF GOLDSMITH
Years in the past, the most important dwelling factor on the earth was regarded as the blue whale. Then somebody found that the most important dwelling factor on the earth was truly the 106 acre, 47 thousand tree Pando aspen grove in central Utah, which genetic testing revealed to be a single organism. With its huge community of underground roots and symbiotic relationship with an enormous ecosystem of fungi, that aspen grove is a superb metaphor for UnitedHealth Group. United, whose revenues quantity to greater than 8% of the US well being system, is the most important healthcare enterprise on the earth. The foundation system of UHG is an enormous and poorly understood subsidiary known as Optum.
At $226 billion annual revenues, Optum is the most important healthcare enterprise within the US that no-one is aware of something about. Optum by itself has revenues which are rather less than 5% of complete US healthcare spending. An ill-starred Optum subsidiary, Change Healthcare, which suffered a catastrophic $100 billion cyberattack on February 21, 2024 that put many of the US well being system on life assist, put its mother or father firm Optum within the headlines.
However Change Healthcare is a tiny (lower than 2%) piece of this huge new (lower than twenty years outdated) healthcare enterprise. If it have been freestanding, Optum can be the 12th largest firm within the US: similar in dimension to Costco and barely bigger than Microsoft. Optum’s topline revenues are nearly 4 occasions bigger than HCA, the nation’s largest hospital firm, one third bigger than the whole lot of Elevance, United’s most vital well being plan competitor, and greater than double the dimensions of Kaiser Permanente.
If there actually have been economies of scale in healthcare, they might imply that care was of demonstrably higher worth offered by huge enterprises like Optum/United than in additional fragmented, smaller, or much less built-in options. It isn’t clear that it’s. If worth doesn’t attain sufferers and physicians in ways in which matter to them—in higher, inexpensive, and extra responsive care, in improved well being or in a much less hassled and extra fulfilling follow—in the end the care system in addition to United will undergo.
What’s Optum?
Optum is a diversified well being companies, financing and enterprise intelligence subsidiary of aptly named UnitedHealth Group. It gives well being companies, purchases medicine on behalf of United’s well being plan, and gives consulting, logistical assist (e.g. claims administration and IT enablement) and enterprise intelligence companies to United’s well being plan enterprise, in addition to to United’s rivals.
Of Optum’s $226 billion topline, $136.4 billion (or 60% of its complete revenues) signify scientific and enterprise companies offered to United’s Well being Insurance coverage enterprise. Company UnitedHealth Group, Optum included, generated $29 billion in cashflow in 23, and $118.3 billion since 2019. United channeled nearly $52 billion of that money into shopping for health-related companies, almost all of which find yourself housed inside Optum.
For many of the previous decade, Optum has been driving pressure of incremental revenue development for United. Optum’s working income grew from $6.7 billion in 2017 (34% of UHG complete) to $15.9 billion in 2023 (55% of complete). Nonetheless, the 2 most worthwhile items of Optum by working margin—Optum Well being and Optum Perception—have seen their working margins fall by one third in simply 4 years. The slowing of Optum’s profitability is a large problem for United.
Gaul Had Three Components, So Does Optum
The biggest and least worthwhile (by p.c margin) piece of Optum is its big Pharmacy Profit Supervisor, Optum Rx, the third largest PBM within the US.
Optum Rx is greater than half of Optum by income ($116.1 billion) however lower than a 3rd of its income. The core of its revenue comes from rebates from drug corporations for that includes their medicine on OptumRx’s formulary- which governs which medicine United Healthcare subscribers get entry to and the way a lot they pay for them. Optum Rx derives nearly 62% of its revenues from managing pharmaceutical spending for United’s well being plan, however the the rest for servicing each well being plan rivals of United and self-funded employers. It’s the most “vertical” piece of Optum—in that it has the best share of its revenues coming from United out of all of Optum’s main segments.
The accounting for these rebates is, to place it gently, lower than clear. A few of these rebates are returned to UHG prospects (reminiscent of self-funded employers). Some are returned to insurers apart from United for which Optum Rx processes pharmaceutical claims. And a few are saved as revenue inside both Optum Rx or United’s medical health insurance enterprise. Optum Rx doesn’t disclose the final word vacation spot of many billions in rebates.
This lack of transparency is, understandably, a topic of political controversy. Congress is contemplating tightening PBM disclosures and presumably redirecting the stream of rebates again to health-plan prospects and, gasp, probably to sufferers themselves. Given the widening political controversy about whether or not PBMs truly save shoppers cash, Optum Rx’s enterprise mannequin is a significant strategic vulnerability for UHG.
The second main piece of Optum, OptumInsight, has been within the glare of public controversy since its Change Healthcare subsidiary was hacked by the mysterious Russian hacker collective BlackCat in February. Its foremost enterprise strains are: enterprise intelligence, consulting, IT enablement, and enterprise course of outsourcing to non-UHG well being enterprises. OptumInsight is the smallest of Optum’s three items at $18.9 billion, however essentially the most worthwhile—22.5% revenue margin—$4.3 billion in working earnings. I’ve written extensively about OptumInsight, nearly 42% of whose revenues derive from servicing United’s different companies, however is not going to repeat that analysis right here.
Optum Well being
The piece we wish to give attention to right here is the most important generator of income for Optum, Optum Well being, a diversified healthcare companies enterprise. Optum Well being is a $95.3 billion enterprise, which makes it the second largest care enterprise within the US after Kaiser Permanente. It generates almost $6.6 billion in working revenue for United. Nonetheless, Optum Well being’s revenue margin declined from greater than 10% in 2018 to about 6.6% within the third quarter of 2023. If not circled, Optum Well being’s declining profitability is a menace to United’s enterprise valuation and repute. For this reason when Optum reported disappointing 3Q23 earnings, United’s Chairman Steven Hemsley cleaned house at Optum Well being, putting in new management.
Since United shouldn’t be required to reveal acquisitions that aren’t “materials”, there isn’t any approach of realizing what United has truly purchased and what it presently owns. However Optum Well being is dwelling to an infinite assortment of doctor teams, surgicenters, a big pressing care community, and two of the most important dwelling well being companies within the US. It’s a sprawling nationwide roll-up of healthcare property.
Optum claims 90 thousand physicians in its networks however is cagey on what number of are literally employed by Optum and what number of are impartial physicians in Unbiased Follow Associations that wrap across the employed teams and are frequent within the West and Southwest. An informed guess can be that Optum employs from 45 to 60 thousand physicians. If true, this is able to nonetheless be between double and triple the dimensions of Permanente Medical Teams. Optum’s profitability dwarfs that of Kaiser (see beneath), maybe a operate of Kaiser operating 39 hospitals and Optum not working a single one.
Optum Well being receives $57.7 billion (or 60% of its complete revenues) from United’s well being plan—the vertical half. However it additionally claims $21.8 billion in premium revenue, e.g. capitation, from “non-affiliated” prospects, specifically well being plan rivals of United’s well being plans. That capitation represents nearly 23% of Optum Well being’s complete revenues. As well as, Optum Well being experiences $14.1 billion in companies revenue, nearly actually “fee-for-service” primarily based revenue from different well being plans. What share of Optum Well being’s $6.6 billion in income come from these contracts with United’s rivals is a compelling thriller, since this isn’t reported in United’s monetary disclosures.
Regardless of the revenue cut up, Optum Well being could be very a lot dependent not merely on the kindness of strangers, however of rivals of United’s core enterprise. An necessary and unknowable query is whether or not Optum’s contract renewals with these rivals have enabled it to recuperate the hovering prices of nursing protection, non permanent doctor protection, turnover and retirements, and different labor elements which have exploded within the wake of the COVID pandemic. Each care supply enterprise within the US has confronted rising folks prices, as the most important care supply enterprise within the US, these forces haven’t spared Optum.
Optum’s medical group acquisition technique to date has focused impartial (e.g. non-hospital) medical teams with vital at-risk (e.g. “capitated”) populations, primarily in Medicare Benefit plans. These included the unique asset, the Nevada primarily based Sierra Medical Group which United acquired when it purchased the Sierra Health Plan in 2007, but in addition Healthcare Companions, Monarch and North American Medical Administration (primarily based in Los Angeles), WellMed in central Texas, Atrius and Reliant in Massachusetts, Everett and PolyClinic in Seattle and Kelsey Seybold Clinic in Houston Texas. It’s a rising presence in Oregon, New York and Connecticut by primarily smaller acquisitions. The map beneath confirmed the place Optum Well being’s property have been as of 2022.
The Vertical Integration Conundrum
Healthcare strategists have touted the thought of vertical integration –pioneered by Kaiser Permanente—which gives a complete healthcare service expertise—just about soup to nuts—by its well being plan. The one approach to entry Kaiser physicians and hospitals is by enrolling of their well being plan. Vertical integration has been seen as a approach of decreasing well being price (by eliminating middlemen’s income) and procuring services and products extra effectively, although actual evidence that it does so is scarce upon the ground.
With United, the well being plan preceded the well being companies. Within the first thirty years of its existence, United was a “community” plan, which contracted with impartial hospitals and docs for care. With the Sierra acquisition in 2007, United launched into an journey in strategic ambiguity—proudly owning doctor clinics which offered care to United prospects in addition to these of competing well being plans. After Sierra and WellMed, a big capitated medical group in central Texas that Optum acquired in 2011, Optum’s medical group acquisitions have been, at finest, loosely tied to United’s well being plan enrollment. A 2018 evaluation confirmed at finest modest overlap between United’s Medicare Benefit market presence and the Optum Well being community.
Making United “extra vertical” in Optum markets can be difficult. Providing monetary incentives to the Optum Well being sufferers presently enrolled in competing plans to change to United would pose two challenges. One is that this is able to injury Optum Well being’s contracts with competing well being plans. And sharing financial savings (e.g. a few of United’s income) with sufferers to redirect their care or reducing their charges would cut back well being plan revenue margins.
Conversely, telling Optum sufferers that they may solely get care in the event that they enrolled in United’s well being plan would set off a firestorm of adverse publicity to not point out retaliation and cancelled contracts by United’s well being plan rivals. Telling United subscribers they may solely get care from Optum physicians and services would overwhelm them in quantity and set off longer ready occasions and supplier burnout. In sum, it doesn’t seem to make enterprise sense for United to make Optum extra “vertically aligned” with its well being plans. So straddling rivals in native markets appears to be an ambiguity with which United must cope going ahead.
How a lot unregulated and invisible revenue United’s well being plans can generate “inside” United’s seen and extremely regulated medical loss ratio (MLR) by selectively and generously compensating Optum’s physicians, surgical services, and so on. is essentially the most compelling thriller of this enterprise mannequin. Matthew Holt, a veteran business observer, has termed this technique of maximizing enterprise revenue by contracting favorably with your self “supplier fracking.” Corporations that management each insurance coverage and care supply have a substantial amount of flexibility in what the accountants time period “switch pricing”. This flexibility is effective and can be misplaced have been Optum to be spun off in a future United restructuring.
Two Massive Dangers for the Partially Built-in Optum Well being
There are two different main clouds on the horizon for Optum Well being. One is the Federal Commerce Fee’s proposal to ban of non-compete clauses for company workers, together with physicians. Non-compete clauses successfully make the affected person populations of acquired doctor teams the property of Optum. If physicians depart Optum, they’re required to maneuver out of the group to follow, surrendering their sufferers to the corporate.
Lots of the senior physicians who have been fairness holders within the giant practices acquired by Optum departed millionaires with United’s money, forsaking junior colleagues to undergo by each Optum system conversions and management adjustments that affected their every day lives as practitioners. Outlawing non-competes would allow disgruntled Optum physicians to stay of their dwelling communities and take their sufferers with them.
If FTC precedents maintain, the non-compete clause prohibition may not apply to non-profit hospitals (80% of all hospitals are non-profit), placing Optum and different company employers of physicians at a aggressive drawback. For my part, entities that depend on coercive measures like non-competes to guarantee doctor loyalty have to take a protracted laborious take a look at their company tradition.
The FTC’s proposed ban on non-competes is a significant enterprise danger for Optum Well being’s huge agglomeration of medical teams. If enacted, it could pressure Optum administration immediately to deal with doctor working situations, values, and priorities. United does have the potential for markedly decreasing the documentation burden for Optum physicians that deal with United sufferers by selectively altering its claims evaluation methods. It is going to be fascinating to see in the event that they achieve this.
E Pluribus Unum
The opposite main cloud on the horizon is the unionization of physicians. According to AMA, some 67 thousand practising physicians (e.g. not interns, residents or fellowship trainees) are members of labor unions. There are been a number of latest excessive profile cases the place disillusioned hospital-employed physicians elected union illustration (Allina in Minneapolis/St Paul, Providence St. Vincent and Legacy Health in Portland OR, are latest examples).
Unionization is usually not motivated immediately by compensation points however somewhat by a way of powerlessness and a sense that core points that have an effect on the worker will not be being addressed. Unionization would each improve Optum’s working prices and cut back its administration’s flexibility. Optum Well being’s teams are by far the most important and most profitable goal of doctor unionization in america.
Down within the Valley
The rising market dangers for Optum may be seen in two medium sized cities in Oregon’s Willamette Valley. Through the early pandemic, Eugene-based Oregon Clinic encountered terminal working difficulties and offered to Optum in late 2020. In March of this 12 months, Optum sent letters to patients of departing Oregon Clinic physicians that they must discover care elsewhere as a result of they have been unable to recruit replacements for his or her physicians. These 32 physicians resigned, apparently, as a result of they have been sad with working situations at Oregon Clinic after the Optum takeover. Studying between the strains, attributable to non-competes, the departing physicians have been unable to stay the Eugene space and thus unable to proceed seeing long-standing sufferers.
In the meantime, up the street forty miles in Corvallis, Optum requested that the State of Oregon expedite evaluation of its proposed acquisition of the Corvallis Clinic attributable to accelerating money stream difficulties that made it inconceivable for the Clinic to satisfy its payroll. The State in the end acceded to Optum’s request. The obvious reason for the money stream drawback: the Change Healthcare cyberattack, which made it inconceivable for Change, an Optum subsidiary to just accept or pay claims from its supplier networks, together with, almost definitely Corvallis Clinic. In different phrases, the catastrophic system failure of 1 piece of Optum seemingly accelerated one other piece of Optum’s acquisition of the most important doctor group on the town.
Taken collectively, these simultaneous issues haven’t served to reinforce Optum’s picture as a care supplier within the southern Willamette Valley. They make the corporate seem as a chilly and exploitative outsider capitalizing on issues it helped create. These occasions is not going to improve the chance of United rising its core insurance coverage enterprise within the space or endear the corporate to Oregon’s well being system regulators, or its state managed Medicaid program, the Oregon Well being Plan.
Outgrowing Its Nervous System?
Optum Well being has nearly quadrupled in dimension prior to now six years, however its revenue margin has fallen by a 3rd. Given the explosive tempo of acquisitions and the price pressures on doctor practices throughout and after the COVID pandemic, this margin deterioration isn’t a surprise. Nonetheless, if Optum Well being’s new administration doesn’t stabilize its working efficiency, margins might deteriorate additional, placing strain on United’s earnings.
There are no evident economies of scale or co-ordination in physician services. How Optum can recruit and retain top quality motivated physicians and superior follow nurses to its huge care system is a significant problem to the enterprise. They’ll want a compelling reply to the query: “Why work for Optum?” The reply can’t be: we’re large and also you don’t have a alternative. How the corporate creates worth for its tens of hundreds of physicians and nurses would be the central administration dealing with United, or certainly any large-scale employer of those advanced professionals.
There may be rising proof that there are diseconomies each of scale and co-ordination in well being companies typically. These diseconomies manifest themselves within the huge empty house between the large enterprise and the physicians and sufferers who depend on them. Each denial of care by United’s AI-driven claims administration system makes a tiny dent within the firm’s shopper picture. Affected person anger over arbitrary and self-interested well being plan meddling in care selections resulted in first managed care backlash within the late 1990’s. United’s recent Net Promoter Score of -5 means that it has a protracted approach to journey to regain buyer confidence and loyalty.
The physician-patient relationship stays the bedrock of the well being system. If the nerve endings of an enterprise don’t attain out and sense the impact it’s having on that relationship, it isn’t going to be very lengthy earlier than it both ceases to develop or ceases to be worthwhile or, seemingly, each. United and Optum have reached that tipping level proper now. Comply with Optum’s physicians and their sufferers and see the long run.
Acknowledgements: Trevor Goldsmith offered analysis and technical assist for this piece. The writer appreciates Ian Morrison, Andrew Mueller and Jamie Robinson for studying and commenting on this piece.
Jeff Goldsmith is a veteran well being care futurist, President of Well being Futures Inc and common THCB Contributor. This comes from his personal substack
