Three Reasons UnitedHealth Group Inc. (UNH) Could Lose Steam

3. Health care costs

Some point to slowing growth health care costs as encouraging signs of a new trend. However, even optimists admit that much of this improvement is due to the recession and its aftermath.

There are several reasons why the recent good news could dissipate in the near future. The economy could improve, resulting in individuals spending more money on health care. If Obamacare results in millions of new people with health insurance, the demand for health care could rise — driving costs upward. Fewer big-dollar drugs are going off-patent than in the last few years. We also can’t forget the baby boomer generation entering the years that tend to require more health care.

UnitedHealth is already seeing some higher costs. The company reported first quarter net earnings of $1.2 billion, down from $1.4 billion the year before. According to UnitedHealth, a higher medical care cost ratio was to blame. As costs go up, it becomes more difficult for insurers like UnitedHealth to achieve strong earnings growth.

Positive realism

My view is that UnitedHealth isn’t likely to climb 40% over the next couple of years for the reasons listed above. I suspect the stock could slow down somewhat. However, I’m not negative about UnitedHealth over the long run. The company’s scale as the nation’s largest health insurer, combined with nice growth opportunities with Optum and a 1.7% dividend yield, make it attractive. Two years from now isn’t as important as 20 years from now.

The article 3 Reasons UnitedHealth Could Lose Steam originally appeared on Fool.com and is written by Keith Speights.

Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint.

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