Can UnitedHealth Overcome Obamacare's Shaky Start in 2014?

Can UnitedHealth Overcome Obamacare's Shaky Start in 2014?

The Dow Jones Industrial Average has had a smashing year, surging by nearly 20% since 2013 kicked off. Yet even the Dow's big pop hasn't matched that of health-care giant and Dow member UnitedHealth Group , which has jumped by more than 37% so far this year.

It's been a big year for UnitedHealth, and investors certainly haven't been disappointed by the stock's run-up. But can this blue-chip insurer hit the jackpot again in 2014? From growing membership rolls to Obamacare's ongoing rollout, here's where UnitedHealth could be headed in the new year.

Obamacare takes center stage
UnitedHealth's done well in growing membership subscription rolls in 2013. Even with rather tepid growth in the third quarter, the company's total medical membership has grown by 24% through the first nine months of the year. But Investors shouldn't expect anything close to that number in 2014, even with Obamacare's launch.

Much of UnitedHealth's membership growth this year has come through the addition to its portfolio of the military's TRICARE system and its more than 2.9 million members. That won't help UnitedHealth's growth in 2014, although it is a bulwark of members that will help the company balance out potential rising costs from the Obamacare rollout. UnitedHealth's 8% growth in its largest single pool of customers, its fee-based commercial subscribers, should help balance Obamacare's launch as well, although growth could be slower given the enhanced requirements of health-care plans under the new law.

And what should investors expect from Obamacare? If early results are anything to go by, don't assume UnitedHealth will benefit much in terms of raw membership growth. The company's hedged its own exposure to the new law by only opting to participate in a handful of state exchanges across the nation.

While this might seem as if it will crimp UnitedHealth's membership growth, it will also contribute to cutting down on rising costs at the company, particularly as many of Obamacare's early adopters are projected by some analysts and observers to be sicker or older. Medical costs have risen faster than premium revenue through the first nine months of the year, so the plan should help UnitedHealth slow down that trend in 2014.

Furthermore, President Barack Obama's recent decision to allow health insurance plans that did not comply with the new rules to be extended for one more year should help UnitedHealth and other big insurers adapt to the law over time. It might not help Obamacare itself much in 2014 if currently insured Americans with noncompliant plans stick with their health care, but it's certainly not a stumbling block for the largest insurance companies.

The new law's cuts to Medicare Advantage payments will also hurt UnitedHealth's growth in 2014. Company CEO Stephen Helmsley has pointed out this problem and responded by(controversially) dropping some doctors. However, Medicare Advantage members represented only roughly 6.5% of UnitedHealth's total subscription base as of the end of the third quarter. The total fallout from reduced payouts will likely hurt, but won't drastically cripple UnitedHealth's growth potential.

The company is growing abroad to help compensate, and its purchase of Brazilian health insurer Amil in late 2012 looks better and better. If health-care reform continues its shaky start into the new year, it wouldn't be surprising to see UnitedHealth make another foreign acquisitions foray in order to offset the unpredictable U.S. market.

The best bet in the industry
In all, Obamacare's rollout will dominate UnitedHealth's 2014. Cost concerns and risk have pushed UnitedHealth and its major rivals away from many state exchanges, and in the first year of the law investors shouldn't expect serious growth to UnitedHealth's membership count. Still, analysts are projecting solid, if not spectacular, full-year earnings-per-share growth of nearly 3.5% in 2014, along with full-year revenue growth of more than 8% -- less than this year's 10.5% full-year revenue estimate, but not a bad number.

It's a year of transition for all insurers, not just UnitedHealth. However, this company's big enough -- and proven enough -- to handle health-care reform's shaky rollout. Don't expect additional 37% yearly gains from UnitedHealth's stock, especially in light of the volatility it has endured since Obamacare's start. However, there's perhaps no other publicly traded insurer as well-situated to sail brightly into the future of health care.

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