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DaVita deal takes UnitedHealth further into medical care

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DaVita deal takes UnitedHealth further into medical care

OptumCare's bid for DaVita Inc.'s DaVita Medical Group would build out Optum's medical care business, further widening the reach of an already massive healthcare conglomerate, analysts said.

OptumCare is a division of Optum, UnitedHealth Group Inc.'s non-insurance unit. Optum owns surgical centers, the third-largest pharmacy benefit manager in the U.S., software and information products and dozens of other non-insurance products and services.

Optum bid $4.9 billion in cash for DaVita Medical Group, which operates clinics and other medical care facilities. If the deal closes, DaVita would be merged with OptumCare, which provides physician-led primary, specialty, in-home, urgent- and surgery-care delivery through affiliated physicians and care facilities. The deal is expected to close in 2018.

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UnitedHealth's acquisition of DaVita Medical Group aligns with the healthcare conglomerate's strategy of expanding in clinical care services, analysts affirmed.

Cantor Fitzgerald equity analyst Steven Halper said the transaction cuts out the middleman between insurers and provider networks, a division that often increases costs.

"[UnitedHealth executives] have made it perfectly clear they want to grow the provider business," he said. "It diversifies your revenue stream away from the highly regulated insurance market and it's a very productive vehicle to deploy free cash."

DaVita Medical Group serves about 1.7 million patients annually. It operates and manages about 300 clinics, 35 urgent care centers and six outpatient surgery centers in California, Colorado, Florida, Nevada, New Mexico and Washington.

Based on third-quarter results, the company's annualized revenue was about $4.7 billion, with about 83% classified as risk-bearing revenue. DaVita Medical Group's profitability has been "negatively impacted" by higher medical costs, Halper said, but he expects Optum to improve the results over time. Halper also noted that the company has been underperforming recently in its dialysis division.

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According to an S&P Global Market Intelligence survey of UnitedHealth acquisitions in 2017, the company's bid for DaVita Medical Group would top the list by deal value. The next-largest deal UnitedHealth announced in 2017 was valued at around $2.15 billion, for Chilean healthcare company Banmédica S.A.

Mizuho Research Director Sheryl Skolnick wrote in a research note that the deal further "establishes OptumCare's scale and importance to both its payer customers and to UnitedHealth Group's overall performance."

Skolnick pointed out several risks that may limit the deal's benefits. She wrote that the Optum services business is focused on innovations and technology, and any "missteps" could lead to the potential for "material disappointments in results."

She also maintained that political and health policy risks could be significant and that the future of U.S. health policy remains highly uncertain. Among the issues adding to that confusion is the fate of the health insurance industry tax moratorium, which is set to expire.