US healthcare: the Medicare gold rush is on

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The US federal government is the single largest payer for healthcare in America. It spent $1.6tn on Medicare and Medicaid healthcare benefits in 2021 — or more than a third of total healthcare spending.

To contain spiralling costs, the US has pushed for more value-based care. Unlike the traditional fee for service model, the value-based approach rewards doctors for keeping patients healthy, rather than for every service they perform. This should help them manage chronic health problems, and lower the number of costly hospital stays. 

Companies jostling to take advantage of this shift are driving a new wave of mergers and acquisitions in the healthcare industry. 

Cigna is reportedly in talks to merge with Humana in a deal that would create a US health insurance company worth $140bn. This potential blockbuster deal follows smaller transactions over the past year. CVS Health spent nearly $20bn to buy home-care provider Signify Health and primary care provider Oak Street Health. Even Amazon has waded in, buying primary-care operator One Medical for about $3.9bn.

Insurers have targeted enrolment in Medicare Advantage plans, private versions of the US health program for seniors. This is the industry’s biggest growth engine. This value-based approach allows insurers that offer Medicare health plans to pocket any cost savings. In exchange they assume the financial risk of caring for the elderly and disabled.

So far investors find this model appealing. The share prices of those with a large Medicare business, notably UnitedHealth Group and Humana, have outperformed their peers. United, which recently reported a 12 per cent rise in third quarter net income, also trades at a substantial premium to rivals on a price-to-forward earnings basis.

But not every insurer can jump in. A Cigna and Humana tie-up would mean regulatory scrutiny given their combined market dominance. That should keep investors in UnitedHealth in the pink for a while longer yet.