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Takeaway: The Affordable Care Act is putting pressure on managed care providers like $UNH who will undoubtedly deal with rising costs.

The future of managed care has an increasingly negative undertone in regards to the Affordable Care Act. UnitedHealth Group (UNH) will undoubtedly be affected by the Act and rising costs are cause for concern and have made us increasingly bearish on the stock. We expect cost trend to accelerate into 2013, with limited pricing leverage on either the premium or provider payments side to offset the risks to 2013 guidance.

UNH: Dealing With Rising Costs  - UNH chart1

Hedgeye’s Healthcare team has outlined two major drivers of increasing costs that directly affect UNH heading into the new year:

• Physician Utilization: Physician traffic represents roughly 30% of commercial cost trend for managed care, and we expect utilization to accelerate 2H12 and into 2013.  A physician visit leads the care continuum, so we expect incremental utilization to follow subsequent to a rise in physician utilization.

• Birth recovery: We expect births to recover as early as 4Q12 and into 2013.   Not only do births represent a considerable portion of commercial inpatient volumes (30%) and Medicaid inpatient volume (40%), but pregnancies  add additional physician utilization as pre-natal and post-natal populations carrying significantly higher than than average utilization.

UNH: Dealing With Rising Costs  - UNH chart3