Buy Insurers, Sell Hospitals
NEW YORK (TheStreet) -- Amid all the business changes surrounding the Affordable Care Act, the most obvious lesson for investors is being lost.
Buy the insurers. Sell the hospitals.
Companies such as UnitedHealth
Back then, the primary means of controlling costs was the health maintenance organization. The idea was to keep people inside a network, punishing them financially for going outside it, and limit network costs.
The idea died because people could go outside networks, they did go outside them, and doctors outside networks did what they wanted and charged what they wanted.
What has changed now? Groups such as the Mayo Clinic and Intermountain Healthcare of Utah have developed integrated care management and data systems that work. They keep patients inside their networks. They collect fees per patient, rather than per procedure. They have incentives to keep people well and limit expenses.
They are called accountable care organizations. Over the last decade they have been spreading like wildfire in Medicare and Medicaid. With Obamacare they're poised to take over the general market.
UnitedHealth's Humedica unit is just one of the insurance units working directly with Mayo, a nonprofit, on the best practices necessary to make this work.
Over the last four years, all the insurers have been buying Medicare ACOs using this economic model. For example, UnitedHealth bought XLHealth, completing the purchase in 2012.
By controlling both income and expenses, insurers have learned to generate big profits. From 2009 through 2012, UnitedHealth's annual revenue increased 27%, from $87.14 billion to $110.62 billion. Annual net income rose 45%, from $3.82 billion to $5.53 billion.
UnitedHealth and other insurers will now bring ACOs into the general market through the insurance exchanges, in areas where they have the facilities to deliver it profitably. Small wonder that UNH stock is up nearly 190% over the last five years (adjusted for dividends) and has a 28 cent-per-share dividend to boot.
By contrast, consider what all this does to a large hospital chain such as HCA