By Jeff Goldsmith
Years ago, the largest living thing in the world was thought to be the blue whale. Then someone discovered that the largest living thing in the world was actually the 106 acre, 47 thousand tree Pando aspen grove in central Utah, which genetic testing revealed to be a single organism. With its enormous network of underground roots and symbiotic relationship with a vast ecosystem of fungi, that aspen grove is a great metaphor for UnitedHealth Group. United, whose revenues amount to more than 8% of the US health system, is the largest healthcare enterprise in the world. The root system of UHG is a vast and poorly understood subsidiary called Optum. At $226 billion annual revenues, Optum is the largest healthcare business in the US that no-one knows anything about. Optum by itself has revenues that are a little less than 5% of total US healthcare spending. An ill-starred Optum subsidiary, Change Healthcare, which suffered a catastrophic $100 billion cyberattack on February 21, 2024 that put most of the US health system on life support, put its parent company Optum in the headlines. But Change Healthcare is a tiny (less than 2%) piece of this vast new (less than twenty years old) healthcare enterprise. If it were freestanding, Optum would be the 12th largest company in the US: identical in size to Costco and slightly larger than Microsoft. Optum’s topline revenues are almost four times larger than HCA, the nation’s largest hospital company, one third larger than the entirety of Elevance, United’s most significant health plan competitor, and more than double the size of Kaiser Permanente. If there really were economies of scale in healthcare, they would mean that care was of demonstrably better value provided by vast enterprises like Optum/United than in more fragmented, smaller, or less integrated alternatives. It is not clear that it is. If value does not reach patients and physicians in ways that matter to them—in better, less expensive, and more responsive care, in improved health or in a less hassled and more fulfilling practice—ultimately the care system as well as United will suffer.
What is Optum? Optum is a diversified health services, financing, and business intelligence subsidiary of aptly named UnitedHealth Group. It provides health services, purchases drugs on behalf of United’s health plan, and provides consulting, logistical support (e.g. claims management and IT enablement) and business intelligence services to United’s health plan business, as well as to United’s competitors. Of Optum’s $226 billion topline, $136.4 billion (or 60% of its total revenues) represent clinical and business services provided to United’s Health Insurance business. Corporate UnitedHealth Group, Optum included, generated $29 billion in cashflow in 23, and $118.3 billion since 2019. United channeled almost $52 billion of that cash into buying health-related businesses, nearly all of which end up housed inside Optum. Source: 2023 UNH 10K
For most of the past decade, Optum has been the driving force of incremental profit growth for United. Optum’s operating profits grew from $6.7 billion in 2017 (34% of UHG total) to $15.9 billion in 2023 (55% of total). However, the two most profitable pieces of Optum by operating margin—Optum Health and Optum Insight—have seen their operating margins fall by one third in just four years. The slowing of Optum’s profitability is a huge challenge for United. Gaul Had Three Parts, So Does Optum
The largest and least profitable (by percent margin) piece of Optum is its giant Pharmacy Benefit Manager, Optum Rx, the third largest PBM in the US. Optum Rx is more than half of Optum by revenue ($116.1 billion) but less than a third of its profits. The core of its profit comes from rebates from drug companies for featuring their drugs on OptumRx’s formulary- which governs which drugs United Healthcare subscribers get access to and how much they pay for them. Optum Rx derives almost 62% of its revenues from managing pharmaceutical spending for United’s health plan, but the remainder for servicing both health plan competitors of United and self-funded employers. It is the most “vertical” piece of Optum—in that it has the highest share of its revenues coming from United out of all of Optum’s major segments. The accounting for these rebates is, to put it gently, less than transparent. Some of these rebates are returned to UHG customers (such as self-funded employers). Some are returned to insurers other than United for which Optum Rx processes pharmaceutical claims. And some are kept as profit inside either Optum Rx or United’s health insurance business. Optum Rx does not disclose the ultimate destination of many billions in rebates. This lack of transparency is, understandably, a subject of political controversy. Congress is considering tightening PBM disclosures and possibly redirecting the flow of rebates back to health-plan customers and, gasp, potentially to patients themselves. Given the widening political controversy about whether PBMs actually save consumers money, Optum Rx’s business model is a major strategic vulnerability for UHG.
The second major piece of Optum, Optum Insight, has been in the glare of public controversy since its Change Healthcare subsidiary was hacked by the mysterious Russian hacker collective BlackCat in February. Its main business lines are: business intelligence, consulting, IT enablement, and business process outsourcing to non-UHG health enterprises. OptumInsight is the smallest of Optum’s three pieces at $18.9 billion, but the most profitable—22.5% profit margin—$4.3 billion in operating earnings. I have written extensively about OptumInsight, almost 42% of whose revenues derive from servicing United’s other businesses, but will not repeat that analysis here. Optum Health The piece we want to focus on here is the largest generator of profits for Optum, Optum Health, a diversified healthcare services enterprise. Optum Health is a $95.3 billion business, which makes it the second largest care enterprise in the US after Kaiser Permanente. It generates nearly $6.6 billion in operating profit for United. However, Optum Health’s profit margin declined from more than 10% in 2018 to about 6.6% in the third quarter of 2023. If not turned around, Optum Health’s declining profitability is a threat to United’s enterprise valuation and reputation. This is why when Optum reported disappointing 3Q23 earnings, United’s Chairman Steven Hemsley cleaned house at Optum Health, installing new leadership. Since United is not required to disclose acquisitions that are not “material”, there is no way of knowing what United has actually bought and what it presently owns. But Optum Health is home to an enormous collection of physician groups, surgicenters, a large urgent care network, and two of the largest home health agencies in the US. It is a sprawling nationwide roll-up of healthcare assets. Optum claims 90 thousand physicians in its networks but is cagey on how many are actually employed by Optum and how many are independent physicians in Independent Practice Associations that wrap around the employed groups and are common in the West and Southwest. An educated guess would be that Optum employs from 45 to 60 thousand physicians. If true, this would still be between double and triple the size of Permanente Medical Groups. Optum’s profitability dwarfs that of Kaiser (see below), perhaps a function of Kaiser operating 39 hospitals and Optum not operating a single one. Source: UNH 10K, Kaiser Annual Report Optum Health receives $57.7 billion (or 60% of its total revenues) from United’s health plan—the vertical part. But it also claims $21.8 billion in premium income, e.g. capitation, from “non-affiliated” customers, namely health plan competitors of United’s health plans. That capitation represents almost 23% of Optum Health’s total revenues. In addition, Optum Health reports $14.1 billion in services income, almost certainly “fee-for-service” based income from other health plans. What share of Optum Health’s $6.6 billion in profits come from these contracts with United’s competitors is a compelling mystery, since this is not reported in United’s financial disclosures. Whatever the profit split, Optum Health is very much dependent not merely on the kindness of strangers, but of competitors of United’s core business. An important and unknowable question is whether Optum’s contract renewals with those competitors have enabled it to recover the soaring costs of nursing coverage, temporary physician coverage, turnover and retirements, and other labor factors that have exploded in the wake of the COVID pandemic. Every care delivery enterprise in the US has faced rising people costs, as the largest care delivery enterprise in the US, these forces have not spared Optum. Optum’s medical group acquisition strategy to date has targeted independent (e.g…
