What The Insurers Are Buying And Why

Includes: AET, ANTM, CI, HNT
by: Dana Blankenhorn

Under the Affordable Care Act, insurers want to own the downstream channel.

If you're providing the care, and handling the money, you have an incentive to save on giving care. Prevention being worth a pound of cure, and prevention being covered standard under the ACA, the incentive is doubled.

The big money here is in Medicare and, to a lesser extent, Medicaid. These are sources of government-guaranteed cash flow, and if you can keep the patients out of the hospital, the excess profits are yours to keep through so-called Accountable Care Organizations. So far, it's working out great for the ACOs.

Socialism. It's good for business. And if you're an insurance CEO, it's what's for dinner.

It can work even better if you own the outfit providing the care. That's what drove WellPoint (WLP) to buy Amerigroup Corp. (AGP) for $4.9 billion cash, a hefty premium, and yet the bean-counters are cheering.

This puts companies like Health Net Inc. (HNT) squarely into the sights of insurers. And despite the rhetoric coming from Texas Gov. Rick Perry, both Aetna (AET) and Cigna (CI) are willing to buy Medicare cash flows in that state, hoping for a gusher later on when the state decides to play ball on Medicaid.

The financial formula is pretty simple. Become an ACO and the accountants will cheer, plus you have the chance of a take-out later on at a hefty premium.

All of which explains why Cerberus' Steward Health Care is now competing directly with Boston's teaching hospitals. It can grab guaranteed business as an ACO, underbidding based on costs, and get an insurer to take them out down the road at a very hefty profit indeed.

So watch those ACO deals closely, especially those involving Medicare and Medicaid patients. There's big profits to be made, and insurers anxious to do business with the winners.

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