United Healthcare (UNH) is the largest health insurer in America by revenue and market share.1
Like its peers, it is vertically integrated to ensure its economic moat.
UnitedHealthcare's key advantage stems from its aggressive pursuit of vertical integration, which has created a strong economic moat in the following ways:
Optum's Powerhouse: UnitedHealthcare's parent company, UnitedHealth Group, owns Optum, a massive subsidiary that operates across healthcare delivery, pharmacy benefit management (PBM), and data analytics. This integration allows UnitedHealthcare to:
Potentially Reduce Costs: OptumCare, Optum's healthcare delivery arm, can negotiate lower rates with specialists and hospitals within the same company umbrella. This can lead to overall cost savings for UnitedHealthcare.
Improved Care Coordination: Sharing data between Optum and UnitedHealthcare allows for a more holistic view of a patient's health. This can improve care coordination and potentially reduce unnecessary procedures.
Profitability Boost: Optum often has higher profit margins than the insurance side. By capturing more of the healthcare revenue stream, UnitedHealth Group benefits from this diversification.
Capturing More Revenue: Vertical integration allows them to potentially capture revenue at various stages of a patient's healthcare journey. For instance, UnitedHealthcare might insure a patient, OptumCare might provide their primary care, and OptumRX might manage their prescriptions. These wider net captures more healthcare dollars within the same company.
Competitive Advantage: Having a vast in-house care delivery network gives UnitedHealthcare an edge over competitors who rely solely on external providers. They can potentially offer more competitive plans or better manage costs by influencing how care is delivered within their network.
It's important to note that vertical integration in healthcare is a controversial topic. While it can offer efficiencies, some argue it might limit patient choice and restrict competition. Regulatory scrutiny is also a potential hurdle. However, for now, UnitedHealthcare's vertical integration strategy is a significant contributor to its economic moat.
This regulatory scrutiny along with the recent cyber-attacks has led to the stock’s recent fall. However, I believe these temporary setbacks have created a rare opportunity to accumulate shares. This rare opportunity has only presented itself twice in the last two decade. Let’s review the charts.