Davita Buy Points To Health Care's Future

| About: DaVita HealthCare (DVA)

What most doctors have feared as a consequence of health care reform is happening anyway.

They are becoming employees rather than small businesses.

That's the lesson of Davita's (NYSE:DVA) $4.42 billion purchase of Healthcare Partners, a privately held physicians group with 700 doctors in California, Nevada and Florida.

Once a physician becomes an employee, of course, their fate becomes the property of others. Healthcare Partners, which specializes in senior care, will now be linked to a global string of dialysis clinics - dialysis is a service heavily used by seniors.

But the deal will only make DVA itself more attractive as an acquisition target. My guess is the ultimate buyer will be an insurance company.

That's because cost control results when the person holding the money owns the facilities providing the care. No matter your health care system, whether it's public or private, you can't have an unlimited draw from a limited pool of funds.

When Cigna (NYSE:CI) bought Healthspring last year, it was gaining some of this control. Just as when Humana (NYSE:HUM) bought MD Care, another player in the same space.

This consolidation and control by insurers is happening in the Medicare area because there is a vast pool of funding waiting to be tapped, and because cost controls will be mandatory within that pool in order to meet deficit-reduction targets.

This then becomes a model for health care given to children, thanks to SCHIP and Medicaid programs, which have the same pressures, and with insurers being the ultimate buyers of facilities it will gradually become accepted in the rest of the market too.

When you choose an insurer, in other words, you'll be choosing your doctor, and your hospital. Over time, doctors and hospitals whose facilities aren't owned by insurers will have a harder time getting patients, which will result in the final consolidation of the space.

Lots of people think they can make money in that environment. Berkshire-Hathaway (NYSE:BRK.A), for instance, owns 6.4% of DVA and has recently increased its stake.

Regardless of what the Supreme Court rules concerning "Obamacare," this trend is going to continue, even accelerate. Expect more such deals.

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