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UnitedHealth to Buy Advisory Board's Health Care Business

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Health insurer, UnitedHealth Group Inc.’s (UNH - Free Report) health services unit Optum has announced that it will acquire the health care business of The Advisory Board Company .

The buyout will bolster the company’s population health management business which includes aggregation of patient data across multiple health information technology resources along with the analysis of that data into a single, actionable patient record. This synthesized data can then be used to improve both clinical and financial outcomes.

Further, the acquisition is believed to be strategically attractive for Optum as it will provide cross-selling opportunities and diversification benefits.

UnitedHealth has chosen Advisory Board owing to its strong market reputation, and large and important client base in its Health Care segment.

Advisory Board health care segment provides three services — research, technology and consulting. These services combined with Optum’s unmatched data analytics resources, investment capacities and operational experience will help it to better serve members and clients.

UnitedHealth aims to make it big in the market for population health management which is anticipated to grow significantly in the coming years.

The need for population health management is becoming imperative as the healthcare payment system moves from the one based on fee-for-service and volume of patients served to one based on value, improvements in patient health, and associated decreases in healthcare costs.

Consequently, we will not be surprised to see other players in the industry expanding or deploying population health management program.

The board of directors of Advisory Board has approved the merger agreement. The deal valued at nearly $1.3 billion is expected to conclude in late 2017 or early 2018. However, post completion it will not be accretive to earnings in the first year.

In past year shares of UnitedHealth have returned 44.6%, higher than the industry’s gain of 42.6%.

UnitedHealth’s Optum business is a jewel in its crown. It remains a strong revenues and earnings growth driver. The segment provides immense diversification benefits to the company and is expected to generate long-term earnings growth in the high-teens.

Management is considering the expansion of the health service business to generate 30-40% of operating income over the longer term and has been making acquisitions in the area. Moreover, the company is under-penetrated in the health service area and that investments in this field will reap benefits over the long term.

UnitedHealth carries a Zacks Rank #3 (Hold). Some better-ranked players in the same space are Aetna Inc. (AET - Free Report) and WellCare Health Plans, Inc. (WCG - Free Report) . Both these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Aetna, one of the largest health benefits company, beat estimates in each of the last four quarters with an average positive surprise of 19%.

WellCare Health Plans provides managed care services targeted exclusively at government-sponsored healthcare programs. It beat estimates in all the trailing four quarters with an average positive surprise of 47.4%.

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