The US health insurance industry continues to come under scrutiny after it made headlines following a murder UnitedHealth Group Inc. New York Stock Exchange: UNG owned by United Healthcare CEO Brian Thompson. The debate over whether healthcare and health insurance should be a “for-profit” business is a controversial topic. Proponents of universal health care argue that it goes against the Hippocratic Oath to which doctors swear, and that health care should be a right, not a privilege.
Capitalism: The strong become stronger through consolidation
HCA Healthcare Today
HCA Healthcare
As of 3:58 pm ET
- 52 week range
- $276.50
▼
$417.14
- Dividend yield
- 0.86%
- P/E ratio
- 13.76
- Target price
- $385.27
In the capital markets, powerful companies continue to become stronger through consolidation as they acquire, merge, and merge competitors to gain market share and increase economies of scale. The situation in the medical sector has not changed. UnitedHealth Group demonstrated this by acquiring regional insurers such as Mid-Atlantic Medical Services, MetraHealth, Oxford Health Plans, Healthwise and more than 20 other companies to become the nation’s largest health insurance company.
HCA Healthcare Inc. New York Stock Exchange: HCAformerly known as Hospital Corporation of America, has completed more than 20 acquisitions of hospitals, outpatient facilities and medical centers, becoming the largest for-profit hospital operator in the country. This growth has also divided the health care industry into two sides: providers who provide care and payers who reimburse for that care. Bringing the two sides together under an integrated healthcare model sounds good in theory, but is it actually possible? Yes and no.
Kaiser Permanente: The Original “Not-for-Profit” Integrated Health Model
Kaiser Permanente, one of the largest integrated health systems, provides a model for how integrated health care can work. Kaiser Permanente was born out of necessity in the 1940s when industrialist Henry J. Kaiser needed to find a way to provide health care for his construction workers during the construction of the Hoover Dam. He collaborated with Dr. Sidney Garfield, who developed a prepaid health care model that emphasized prevention and effective treatment.
The health care system has become vertically integrated by bringing hospitals, physicians, pharmacies, and insurance companies under one organization to provide coordinated care with a focus on health. Their medical centers have full-time physicians and health care providers, and many specialists work in their buildings. A patient can visit their primary care physician on one floor, go to a laboratory on another, and receive a consultation with a cardiologist or orthopedic surgeon—all in one building. Today, the Kaiser Permanente organization consists of the Kaiser Foundation Health Plan, Kaiser Foundation Hospitals and Permanente Medical Groups. Kaiser Permanents insures more than 12.5 million members, employs more than 220,000 employees, including more than 24,600 physicians and 73,600 nurses in nine states and Washington, D.C., as well as more than 40 independent hospitals and 610 medical offices and institutions.
Very profitable “non-profit” organization with an MLR of 85%
Kaiser Permanente has one of the lowest health claims denial rates at just 6% and is still profitable. In 2023, for the first nine months of 2024, Kaiser Permanente reported operating revenue of $85.4 billion and operating profit of $1.2 billion, compared with $1.1 billion in the same period last year. The company also noted higher-than-expected utilization levels. Non-operating income for the quarter was $1.4 billion. Net income increased to $845 million compared to $249 million in the same period last year. The medical care ratio (MCR) al, also known as the medical loss ratio (MLR), is the ratio of insurance premiums spent on medical services. Kaiser Permanente reports its MLR annually. In 2023 and 2022, it maintained an MLR of 85% while maintaining its medical claims denial rate at just 6%.
CVS Health proves it can’t be done in public markets
CVS Health Today
As of 3:58 pm ET
- 52 week range
- $43.56
▼
$80.75
- Dividend yield
- 5.10%
- P/E ratio
- 13.24
- Target price
- $68.71
Pharmacy and dispensary operator CVS Health Company. New York Stock Exchange: CVS acquired Aetna Health Insurance in a $69 billion acquisition in November 2018. The goal was to create an integrated health care company consisting of Aetna health insurance, CVS Pharmacies and CVS Minute Clinics to provide primary care services. Analysts had high hopes for this mega healthcare company, but that vision has so far failed miserably.
On October 21, 2024, CVS abruptly fired its CEO Karen Lynch, the architect of Aetna’s attempted merger and integrated healthcare model, after missing a series of earnings reports, causing the stock to fall 24%. CVS also reported another miss: GAAP diluted earnings per share of 7 cents, down $1.75 from the year-ago period. Adjusted earnings per share fell to $1.09 from $2.21 a year ago. The medical benefit ratio (MCR) increased to 95.2% from 85.7% in the year-ago period as utilization rates and medical costs for Medicare Advantage plan members increased. With such a high MCR, one would expect the claim denial rate to be low, but Aetna’s claim denial rate was still 22%, a far cry from Kaiser’s 6% denial rate, but better than the absurd 33 denial rate % at United Healthcare.
Is Medicare Advantage to Blame?
Soaring Medicare Advantage (MA) utilization rates are a key driver of MCR/MLR growth. CVS has 4.2 million MA plan participants and Kaiser has 1.5 million MA participants. United Healthcare is MA’s largest carrier with 7.5 million members.
Is this why “For Profit” has an incentive to deny claims?
UnitedHealth Group today
United Health Group
As of 3:58 pm ET
- 52 week range
- $436.38
▼
$630.73
- Dividend yield
- 1.55%
- P/E ratio
- 35.39
- Target price
- $626.79
UnitedHealth Group is the closest to a “for-profit” public integrated healthcare model, as it consists of United Healthcare’s health insurance and Optum Healthcare business, which has employed physicians, medical centers and a pharmacy benefit management (PBM) division. While United Healthcare’s MCR is similar to Kaiser Permanente’s at 85.2%, its 33% claims denial rate (according to Value Penguin) makes the company much more profitable, as it reported third-quarter 2024 operating income of $4.2 billion dollars with revenue growth of $100.82 billion compared to Kaiser Permanente’s revenue in the third quarter of 2024 was $29 billion, and operating loss – 608 million dollars.
As a public company, UnitedHealth not only receives incentives, but also has a fiduciary responsibility to generate returns for shareholders. In contrast, Kaiser does not, which is the incentive difference between a claim denial rate of 33% and a claim denial rate of 6%, respectively. The answer to whether integrated health care can work in public markets depends on who it works for. UnitedHealth ensures that it can work for its shareholders, but not so well for its members.
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