Why UnitedHealth Remains The First Health Care Stock To Own

| About: UnitedHealth Group (UNH)


Insurers continue to gain cost containment power in health care.

UnitedHealth is the largest and has the best technology base.

Scandals have hit other sectors, but recovery will come.

I have said something like this before, but if you are to own one health care stock, it should be UnitedHealth (NYSE:UNH).

During the first quarter, UnitedHealth again proved its power against other big insurers. The shares are up 7.7% overall, outpacing a group what was mostly flat to down. This is natural, in part, because while its competitors are in the throes of getting through mergers, and integration. UNH remains bigger than any of them - even after the combinations. Its competitors are merging to become more like what it already is.

Technology is a second reason why UnitedHealth shines in the group. UnitedHealth began buying-up health IT companies over a decade ago, eventually combining them in a unit called OptumHealth. OptumHealth let UnitedHealth take full advantage of both the HiTech Act, the "sweet sweet stimulus cash" provided to the industry in 2009, and ObamaCare itself, whose savings are based in large part on technology.

But what of other sectors in health care? Companies like Centene (NYSE:CNC) have been built to take advantage of the law's incentives, for controlling costs and pocketing the savings. But insurers can also buy facilities, and through insurance contracts, they can control patients just as well. UnitedHealth does this through a unit called Harken Health. The company may say, for public consumption, that it's leaving the ObamaCare exchange, but it is building Harken offices in the very states it says it's leaving.

In the near term, merger mania makes hospital stocks like HCA (NYSE:HCA) attractive. HCA is up 18% so far this year, which beats UnitedHealth's gain. Mergers create oligopolies, shared monopolies in which prices can rise and the biggest players get the biggest gains. But this could prove a short-term phenomenon, as insurers have the ability to arbitrage patients, favoring procedures done in more competitive markets. Hospital stocks other than HCA are down this year.

Pharmaceutical companies did very well over the last five years, with strategies of cutting supply in order to raise prices, especially on generics. That's no longer working. Risk-reward factors are returning to normal, and when the present bear market ends, those companies engaged in real drug discovery, like Regeneron (NASDAQ:REGN), will start getting a bid again. Once the market returns to normal, those companies that have the power to bargain for the best prices, the pharmacy benefit managers like Express Scripts (NASDAQ:ESRX), can also expect to get a bid.

What the insurers have that the other companies in this space don't have is the scale and the market power that is necessary to hold costs down and profit from that. UNH has more of it than anyone else, which is why it remains the best of the bunch.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.