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UnitedHealth Group (UNH - Free UnitedHealth Stock Report) will be taking the place of Kraft Foods in the Dow 30 effective September 24, 2012. We take a look at the company’s beginnings and its evolution into the healthcare titan it is today.

UnitedHealth Group (formerly known as United HealthCare Corporation) was founded in 1977 by entrepreneur Richard Burke and Dr. Paul Ellwood, a health policy advocate who coined the term “health maintenance organization” in the 1960s. It originally served as the parent of Charter Med Incorporated, a small company that was established in 1974 by a group of physicians and other healthcare professionals who wanted to expand health coverage options for consumers. The company’s mission and business model were based on efficiently combining the best practices in medical care with the best business management to improve the health of patients while strengthening the United States healthcare system.

In 1979, UnitedHealth began a very gradual shift toward becoming the UnitedHealth Group we know today when it introduced the first network-based health plan for seniors and began experimenting with offering private-market alternatives for Medicare. Still, the bulk of the company’s early focus was on technology and service systems for healthcare, and it went public in 1984 under the ticker UNH as a healthcare technology specialist. 

The company launched EverCare, a program designed to help coordinate care for individuals in nursing homes, in 1987. Two years later, it introduced a transplant network that helps direct people to the programs equipped with quality physicians and facilities that can handle their complex medical needs. Over time, the program would evolve and expand to include conditions such as cancer, kidney disease, congenital heart disease, women’s health services, and bariatric surgery.

In 1988, UnitedHealth created the modern pharmacy benefits management (PBM) business, linking benefit design with retail pharmacy networks and mail service through a subsidiary, Diversified Pharmaceutical Services. The idea was to contain prescription drug costs for consumers by using economies of scale to negotiate better prices with drugmakers and pharmacies.

The company largely continued along the path of a healthcare technology systems and services company that dabbled in health plans until 1994, when it sold its PBM business to SmithKline Beecham for $2.3 billion. In 1995, it reinvested part of the proceeds into the acquisition of The MentraHealth Companies, which was formed by combining the group healthcare operations of The Travelers Insurance Company and Metropolitan Life Insurance Company. The $1.65 billion deal was a major step for UnitedHealth, which was now on its way to becoming the largest single health plan carrier in the United States.

In 1996, the company patented AdjudiPro, an advanced system for automating much of the claims review process. AdjudiPro helped UnitedHealth reduce the time and cost associated with processing claims submitted by physicians on behalf of patients nationwide. The system was a real breakthrough when it came to demonstrating how modern technology could make core functions of the healthcare system more efficient and allow more resources to be dedicated to helping people live healthier lives. This also showed that UnitedHealth was still in the IT systems and healthcare technology market, and that it was looking to use this background and experience to better serve it in the area of health plan management.

In 1997, UnitedHealth was chosen by AARP to provide health coverage services to its members, and it expanded its EverCare program to serve frail, elderly individuals who wished to live independently at home, as well as those with chronic illnesses or disabilities.

A year later, United HealthCare Corporation formerly reorganized as UnitedHealth Group, and it launched a strategic realignment into independence by linking business segments—UnitedHealthcare, Ovations, Uniprise, Specialized Care Services, and Ingenix. It also released Clinical Profiles, which provide physicians with data comparing their clinical practices to nationally accepted benchmarks for care.

Over the next few years, the company focused on the technology side of the business. For instance, in the late 1990s, it introduced Care Coordination, a program that aimed to eliminate prior authorizations and consolidate fragmented care delivery resources. At the turn of the century, it started to use Web-based technology to better allow individual customers to access relevant health information online among other things. It also used the Internet to help simplify and improve service for physicians, enabling them to do things like check benefit eligibility for patients and submit and review claims.

In 2002, it bought AmeriChoice as its platform for serving populations in public programs. It would later merge its legacy Medicaid business into AmeriChoice. In 2004, it made another large acquisition, purchasing Oxford Health Plans. A little more than a year later, UnitedHealth received final regulatory approval for its $9.2 billion purchase of PacifiCare Health Systems. Along the way, the company would introduce consumer-driven health plans that integrated high-deductible health plans with health reimbursement accounts. It also created a subsidiary, Golden Rule, to offer health savings accounts for individuals and employer groups.

The number of acquisitions would increase dramatically between 2007 and 2012. The company bought Sierra Health Services, which provided health benefits and services to members in Nevada as well as to people in senior and government programs throughout the United States, for $2.6 billion. In 2009, Ingenix acquired AIM Healthcare, a leading data mining and insurance claim auditing service. That same year, UnitedHealth bought Health Net’s (HNT) northeast-licensed subsidiaries for $570 million. In 2010, Ingenix purchased Picis, a leading provider of health information solutions for the high-acuity areas of hospitals. Finally, in 2012, UnitedHealth completed the acquisition of XLHealth, a sponsor of Medicare Advantage health plans with a primary focus on medicare recipients with special needs.

Over the years, UnitedHealth’s business model has evolved and, today, it is a diversified healthcare company. Through a broad range of businesses, it helps individuals access healthcare at an affordable cost; it aims to simplify healthcare administration and delivery; it promotes evidence-based care; and it provides physicians, healthcare professionals, consumer, and employers with data in order to make better decisions. More specifically, the company has two distinct, but strategically aligned platforms: health benefits operating under UnitedHealthcare and health services operating under Optum.

UnitedHealthcare serves the health benefits needs of individuals through three businesses: UnitedHealthcare Employer & Individual; UnitedHealthcare Medicare & Retirement; and UnitedHealthcare Community & State.

Optum serves health system participants, including consumers, physicians, hospitals, governments, insurers, distributors, and pharmaceutical companies, through its OptumHealth, OptumInsight, and OptumRX businesses.

In 2011, through these two segments, UnitedHealth managed approximately $135 billion in aggregate healthcare spending on behalf of more than 70 million constituents and consumers.

The company’s finances are in very good shape, as its businesses generate plenty of free cash flow. UnitedHealth has the flexibility to continue to pay out a somewhat modest dividend, while pursuing acquisitions, internal growth initiatives, and, more recently, share buybacks.

UnitedHealth faces lots of near-term challenges, which include growing amid the soft economic backdrop; dealing with strained federal, state, and local budgets, and navigating the recently passed healthcare reform laws. Indeed, the stalling job market and the potential for lower corporate profits have hurt UnitedHealth’s ability to add new customers. Strained government budgets and a competitive landscape temper growth prospects, too. On the bright side, we do not expect the healthcare reform laws championed by President Obama to have much of an impact on the company’s bottom line. Moreover, demand for Optum’s services has been robust across the board, as customers are looking to cut costs via efficiency-improvement measures, system upgrades, etc.

Looking long term, there is a lot to like here. The company’s Medicare businesses should get a nice boost, thanks to the aging of the baby boomers, while the overall health plan business ought to get a lift as healthcare becomes more accessible. We expect the Optum business to continue to thrive, too, thanks to its innovative technologies and solutions.

At the time of this article’s writing, the author did not have any positions in the companies mentioned.