Can Integrated Healthcare Stocks Succeed in Public Markets?

Key Points

• An integrated healthcare model merges healthcare providers and payors under one roof.
• Kaiser Permanente is the ideal “non-profit” example of how well an integrated healthcare model can work for its members and patients.
• CVS Health has been failing in its attempt at a successful integrated health model, while UnitedHealth provides it can work well for its shareholders.

America’s health insurance industry continues to face scrutiny after it was thrust into the headlines after the murder of UnitedHealth Group Inc. NYSE: UNH owned United Healthcare CEO Brian Thompson. The debate as to whether healthcare and health insurance should even be a “for-profit” business is a controversial topic. Supporters of universal healthcare argue that it goes against the Hippocratic oath that doctors are sworn by and that healthcare should be a right, not a privilege.

Capitalism: The Strong Get Stronger Through Consolidation

In capital markets, strong companies continue to grow stronger through consolidation as they acquire, merge, and roll up competitors to grow market share and increase economies of scale. It’s been no different in the medical sector. UnitedHealth Group exemplified this by swallowing up regional insurers like 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. NYSE: HCA, formerly known as Hospital Corporation of America, completed over 20 acquisitions of hospitals, ambulatory care facilities, and medical centers to become the largest for-profit hospital operator in the country. This growth has also split the healthcare industry into two sides: the providers who provide medical treatment and the payors who reimburse payments for those medical treatments. Merging the two sides under an integrated healthcare model sounds good in theory, but is it possible in reality? Yes and no.

Kaiser Permanente: The Original “Non-Profit” Integrated Healthcare Model

As one of the largest integrated healthcare systems, Kaiser Permanente is a model of how integrated healthcare can work. Kaiser Permanente evolved out of necessity in the 1940s when industrialist Henry J. Kaiser needed to find a way to provide healthcare for his construction workers during the construction of the Hoover Dam. He collaborated with Dr. Sidney Garfield, who developed a prepaid healthcare model that emphasizes preventative care and efficient treatment.

The healthcare system became vertically integrated by combining hospitals, physicians, pharmacies, and insurance under one entity, allowing for coordinated care with a focus on health maintenance. Their medical centers have salaried doctors and providers and contain many specialties in-house in the buildings. A patient can see their primary care doctor on one floor, go to the lab on another, and have a consultation with a cardiologist or a podiatrist, all in the same building. Today, the Kaiser Permanente organization is comprised of the Kaiser Foundation Health Plan, Kaiser Foundation Hospitals, and Permanente Medical Groups. Kaiser Permanents insures over 12.5 million members, employing over 220,000 employees, including over 24,600 doctors and 73,600 nurses throughout nine states and Washington D.C. with over 40 independently owned hospitals and 610 medical offices and facilities.

A Very Profitable “Non-Profit” Organization With an MLR of 85%

Kaiser Permanente has one of the lowest medical claim denial rates at just 6% and is still profitable. In 2023, For the first nine months of 2024, Kaiser Permanente reported operating revenues of $85.4 billion and operating income of $1.2 billion, up from $1.1 billion in the year-ago period. The company also noted the higher-than-expected utilization rate. Non-operating income was $1.4 billion in the quarter. Net income rose to $845 million, up from $249 million in the year-ago period. 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. It has maintained 85% MLR in 2023 and 2022 while keeping its medical claim denial rate at just 6%.

CVS Health Is Proving It Can’t Be Done in the Public Markets

Pharmacy and drug store operator CVS Health Co. NYSE: CVS acquired Aetna Health Insurance in a $69 billion acquisition in November 2018. The goal was to create an integrated healthcare company comprised of Aetna health insurance, CVS pharmacies, and CVS Minute Clinics to provide primary care services. Analysts had high hopes for the mega healthcare company, but that vision has so far failed miserably.

On Oct 21, 2024, CVS abruptly fired its CEO Karen Lynch, the architect of the Aetna merger and integrated health model attempt, after having missed a number of earnings reports, causing the stock to plummet 24%. CVS also reported another miss with GAAP diluted EPS of 7 cents, down $1.75 from the year-ago period. Adjusted EPS collapsed to $1.09, down from $2.21 a year ago. Its medical care ratio (MCR) surged to 95.2%, up from 85.7% in the year-ago period, as utilization rates and medical costs surged for its Medicare Advantage plan members. With such a high MCR, one would expect their claim denials to be low, but Aetna's claim denial rate was still 22%, a far cry from Kaiser's 6% denial rate, but better than United Healthcare’s absurd 33% claim denial rate.  

Is Medicare Advantage to Blame?

The surge in Medicare Advantage (MA) utilization rates is a key driver of rising MCR/MLRs. CVS has 4.2 million MA plan members, while Kaiser has 1.5 million MA members. United Healthcare is the largest MA carrier, with 7.5 million members.

Is This Why “For Profit” Has Incentive to Deny Claims?

UnitedHealth Group is the closest to being a “for-profit” publicly traded integrated healthcare model as it is comprised of the United Healthcare health insurance and the Optum Healthcare business, which has salaried doctors, medical centers, and pharmacy benefits management (PBM). While United Healthcare’s MCR is similar to Kaiser Permanente’s at 85.2%, the 33% claim denial rate (as reported by Value Penguin) keeps the company much more profitable as it reported Q3 2024 operating income of $4.2 billion on revenue growth of $100.82 billion, versus Kaiser Permanente’s Q3 2024 revenue of $29 billion and an operating loss of $608 million.

Being a public company, UnitedHealth is not only incentivized but has a fiduciary responsibility to make profits for shareholders. In contrast, Kaiser doesn't, which is the incentivized difference between a 33% claim denial rate versus a 6% denial rate, respectively. The answer to whether integrated healthcare can work in the public markets depends on who it works for. UnitedHealth provides it can work for its shareholders, but not as well for its members.