Seniors might not be the demographic targeted by companies selling big-screen televisions, designer jeans and video games, but there’s one industry that loves the elderly: health care insurers.
UnitedHealth Group (NYSE:UNH) recently showed its affinity for the more seasoned members of the population by paying a reported $2 billion to buy XLHealth Corp., a provider of managed care for chronically ill Medicare members. The all-cash agreement is expected be completed in the first half of 2012 and should add to earnings per share, Minnetonka, Minn.-based UnitedHealth said in a statement.
Like its industry competitors, UnitedHealth is seeking to beef up a huge growth business that is likely to gain increasing support from the U.S. government as it trims costs.
Revenue from managed-care plans for Medicare, the U.S. program for the elderly and disabled, may rise by $10 billion by 2015 as baby boomers retire, analysts have said. The purchase of XLHealth, with 111,000 members, is the seventh since the beginning of the year involving companies that manage Medicare coverage.
“This deal makes a lot of sense for UnitedHealth,” Sheryl Skolnick, an analyst at CRT Capital LLC in Stamford, Connecticut, told Bloomberg in a phone interview. Managed care “is likely to get a lot more attention from the federal and state governments in an effort to reduce costs. This will give UnitedHealth even more expertise in an area that’s apt to be growing and more certain than the commercial side of the business.”
Look for more acquisitions as the first baby boomers — people born from 1946 to 1964 — turn 65 this year. Likely targets include Coventry Health Care (NYSE:CVH), WellCare Health Plans (NYSE:WCG) and Health Net (NYSE:HNT).
The XLHealth purchase will further boost UnitedHealth’s leadership in serving Medicare customers. As of Sept. 30, the company already had more than 7 million on its rolls, company filings show. Humana Inc. (NYSE:HUM) in Louisville is second with 4.3 million.
In October, Cigna Corp. (NYSE:CI), the fifth-largest health insurer, agreed to buy HealthSpring Inc., another Medicare managed-care company, for $3.8 billion.
Similar purchases in the area of managing the chronically ill include the takeover of CareMore Health Group by WellPoint Inc. (NYSE:WLP) in June and Nashville, Tenn.-based Inspiris by UnitedHealth at the beginning of the year.
UnitedHealth’s aggressive pursuit of Medicare patients might enable the company to return to the glory days of yesteryear. After pushing $60 a share in December 2007, the company’s stock price plummeted to just above $17 less than a year later. Today, UnitedHealth trades at just under $50, with a trailing P/E of nearly 11.
At the company’s recent investor day, CEO Stephen Hemsley said UnitedHealth would double its profits in the next five years. If he can pull that off, it might vault the company back into the elite growth stock it was from 1991 to 2006.
As of this writing, Barry Cohen did not hold a position in any of the aforementioned stocks.