Managed care has been the biggest healthcare story of the decade, the truest legacy of the Affordable Care Act. Under managed care companies focus on wellness rather than illness. They control costs by owning the places people go to for care and telling them what medicines they should take.
Over the last 10 years Centene (NYSE:CNC) shares have risen almost 950% on Medicare and Medicaid contracts. UNH, which most consider the star of the healthcare sector, is up 840% in that time.
Now UnitedHealth’s Optum unit has created an “accountable care” program in southern California. The sector will never be the same.
Everyone in the Pool
You might ask, why change?
Two reasons. First, because competitors are doing it. Second, because it can.
CVS Health’s (NYSE:CVS) acquisition of Aetna has made it the first true competitor to UNH, at least in terms of revenue. CVS plans to use its thousands of drug stores and hundreds of in-store clinics to deliver first-line care to millions of people.
Walmart (NYSE:WMT) has opened a massive front-line clinic facility in Georgia. Amazon (NASDAQ:AMZN) is taking over 1 million people out of the market with its Haven healthcare unit, also a managed care system.
UnitedHealth, meanwhile, has been laying its plans for nearly a decade. Optum has become a true competitor to companies like Cerner (NASDAQ:CERN) in electronic health records. UNH’s acquisition of Catamaran means it has a pharmacy benefit manager comparable to that of Cigna’s (NYSE:CI) Express Scripts unit. UnitedHealth has also been quietly buying up care providers like DaVita Medical Group, which provides kidney dialysis.
Along the way there have been mistakes. Harken Health, which tried to compete with Kaiser Permanente, was closed. But the company’s sheer size now gives it the ability to play hardball with even large hospitals.
The new Optum offering, called the SignatureValue Harmony Network, will start with 1.5 million customers, combining Optum’s own providers. With DaVita, OptumCare now has more physicians in its networks than HCA Healthcare (NYSE:HCA), the largest hospital operator.
Why Managed Care Works
Managed care works because chronic conditions like diabetes, heart disease and kidney failure represent 75% of the national health bill — and they account for even more of Medicare and Medicaid spending.
These conditions can be prevented by lifestyle changes. Careful management can also keep people out of hospitals. Keeping people out of hospitals is the key to managing risks, as Centene has shown.
UNH’s moves put it in line with industry trends. Its size gives it the power to handle massive amounts of this business profitably.
The Bottom Line on UnitedHealth Stock
Proposals for reforming the nation’s healthcare system are all geared toward the managed care model.
UnitedHealth now has the infrastructure to deliver this model to the mass market.
Given the company’s size, a market cap more than double that of any insurance rival, revenue that has grown by more than one-third since 2015, this move is a very big deal.
UnitedHealth stock is still cheap. Its trailing price-to-earnings ratio of 18 is in line with the market. While the dividend yields just 1.8%, it has nearly tripled in the last five years. UNH has one of Washington’s largest lobbying budgets, and its political contributions are usually split evenly between the parties.
UnitedHealth, in short, looks ready for nearly anything 2020 could throw at it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CVS and AMZN.