GAO Confirms UNH TRICARE W. Award

The Government Accountability Office (GAO) confirmed the U.S. Department of Defense’s (DoD) TRICARE Managed Care Support contract award to UnitedHealth Group Inc. (UNH - Analyst Report). This TRICARE contract for the West region would be effective from April 2013. Under this administrative services contract, the company will support health care delivery to approximately 2.9 million eligible beneficiaries who are active duty service members, retirees and family members based in 21 states of TRICARE’s West region. The contract consists of five one-year option periods and is valued at $20.5 billion.

TRICARE is a health insurance service program meant for working as well as retired military service members and their families.

The TRICARE west region was served by TriWest Healthcare Alliance Corp. since 1996, and was currently serving the area as per the 2003 contract. UnitedHealth raised its doubts over the contract in 2009 and managed to persuade the Department to reconsider its decision. The Department discovered the errors made in the west region contract award and finally reversed its decision in UnitedHealth’s favor.

The contract gives UnitedHealth, the largest U.S. health insurer (on the basis of revenue), access to the military health care market, an area in which the company has sought to establish its presence for quite some time. Last year, the company also sued the DoD for the TRICARE southern region contract valued at $23.5 billion, but lost the contract to Humana Inc. (HUM - Analyst Report).

The contract will accrue considerably to UnitedHealth’s top line, which posted consolidated revenues of $102 billion in 2011. However, the loss of the TRICARE contract will erase much of the total revenue from TriWest as the military business forms the main component of the company’s business.

It is also expanding geographically to offset the restrictions imposed by the Health Care Reform back home. The company is also developing its health service business, branded as Optum, and has made a number of acquisitions recently in this regard.

UnitedHealth is uniquely poised to gain from the changing landscape in the health insurance industry. The company has made a number of acquisitions, both big and small, to reshape its business in the face of new Health Care Reform regulations.

UnitedHealth currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term “Neutral” recommendation on its shares.