If UnitedHealth Group's bid to acquire Change Healthcare is ultimately stopped by the Department of Justice, it would be credit positive for UnitedHealth because of the short-term beneficial effect on debt and leverage.
But UnitedHealth's long-term growth prospects would be incrementally diminished, according to a new analysis.
Moody’s Investors Service released a new report looking at the implications of the proposed $8 billion deal.
A year ago, UnitedHealth Group's Optum unit announced plans to buy healthcare technology company Change Healthcare for $7.84 billion in cash plus about $5 billion in debt.
The deal has been a controversial one, with critics such as the American Hospital Association arguing it could lead to significant consolidation in healthcare data. This month, the Department of Justice (DOJ) filed suit to intervene in UnitedHealth Group's acquisition of Change Healthcare, just days shy of the company's planned consummation date of Feb. 27.
The DOJ asserts the deal would harm competition in commercial health markets as well as the market for technology insurers use to process claims and reduce healthcare costs.
DOJ alleges in the complaint that the merger would give UnitedHealth Group, the parent company of the country's largest commercial insurer, UnitedHealthcare, access to a treasure trove of data on its competitors' sensitive information. This could be used to give the company a leg up and would eliminate its only major rival in first-pass claims editing technology.
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UnitedHealth said the company would “defend itself vigorously” to go forward with the acquisition.
"Change Healthcare and Optum together can increase efficiency and reduce friction in health care, producing a better experience and lower costs," UnitedHealth Group said in a statement to Fierce Healthcare. "The Department’s deeply flawed position is based on highly speculative theories that do not reflect the realities of the health care system. We will defend our case vigorously.”
"When the deal was announced in January 2021, we viewed it as credit negative in the short-term because of the prospective 30% increase in debt and increase to leverage,” Moody’s vice president Dean Ungar said in a statement. “But longer-term, the deal would add meaningful benefits, including increased scale in the revenue cycle management business of OptumInsight, which was already the market leader, Change is the second-leading player."
The deal would add leading technology in claims adjudication, Ungar said.
As of year-end 2021, UnitedHealth had $50.5 billion of outstanding debt, a corresponding 39.7% debt-to-capital ratio.
If the deal were to close as originally expected in early April and financed in first-quarter 2022, Moody's estimated debt-to-capital would rise to 43.2% and debt-to-EBITDA to 2.1x. Leverage would have been significantly higher than those numbers if the deal had closed as originally expected in the second or third quarter of 2021, according to Moody's.
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Without the deal financing, analysts would expect adjusted leverage to improve in this quarter to below 39% for debt-to-capital and approximately 1.7x for debt-to-EBITDA.
As part of the proposed deal, Change Healthcare would become part of Optum, which is composed of three main businesses: OptumRx (pharmacy benefits), OptumHealth (medical providers) and OptumInsight (data, analytics and consulting). Change Healthcare would fold into OptumInsight and would add approximately $1 billion in EBITDA before synergies, Moody's analysts said in the report.
"While this is significant, consolidated UnitedHealth generated $27.1 billion in EBITDA in 2021 with a consistent and high growth rate. Optum, UnitedHealth’s health services subsidiary, has been the main growth driver," analysts wrote.
In 2010, Optum generated $1.1 billion in operating earnings, which was only 14% of consolidated operating earnings. By 2021, Optum’s operating earnings had grown to $12 billion and 50% of consolidated operating earnings, growing 24% per year on average.
Optum, specifically OptumInsight, will remain a robust, high-growth market leader either way, according to Moody's.
OptumInsight generated operating earnings of $3.4 billion, and Moody's estimates it will continue to grow earnings at mid-to-high teens annual rate. Furthermore, there are other potential, smaller acquisitions that could incrementally bolster Optum with less negative effect on leverage.