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UnitedHealth to Buy DaVita Medical, Expands Optum Business

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UnitedHealth Group Inc.’s (UNH - Free Report) Optum unit has announced the buyout of DaVita Medical Group, a unit of DaVita Inc. (DVA - Free Report) , for $4.9 billion in cash.

This acquisition will be made by OptumCare — a sub-segment of Optum — the company’s health services segment. OptumCare provides primary and urgent care delivery services business.

This is the company’s third deal this year to expand its medical services business. It is expected to close in 2018. In March, the unit bought Surgical Care Affiliates for about $2.3 billion. Last month, Optum also bought the health unit of Advisory Board Co., which advises hospital systems.

The company is on an acquisition spree to build its Optum segment gradually. In this regard, the Catamaran and the MedExpress buyout in 2015 are worth mentioning.

The expansion of this segment, which complements its core health benefits business under UnitedHealthcare, should poise the company strongly for growth in an increasingly regulated market.

In the last year, shares of UnitedHealth have gained 38%, in line with the industry's growth it belongs to.

UnitedHealth has been continuously adding related businesses to transform itself from just an insurance company to a comprehensive healthcare provider. The company will now offer a bouquet of services that include selling of health insurance coverage to pharmacy benefit management to improve physician practices.

This transformation is also necessitated by the company’s need to control soaring medical costs to protect margins. Getting vertically integrated, better equips the company to provide superior healthcare services at reasonable costs by ruling out duplication of services and playing a more direct role in medical services.

Meanwhile, an increasing trend of vertical consolidation is being witnessed across the industry, which is itself undergoing rapid transformation owing to heightened regulation, soaring medical costs, increased consumerism, shift to value based care.

Another deal in the same vein is that of the buyout of Aetna Inc. (AET - Free Report) by CVS Health Corp. (CVS - Free Report) , which would enable the surviving company to sell a range of services and products from drug to insurance cover.

We strongly believe consolidation in the sector to continue, which would lead to more deals of this kind going forward.

UnitedHealth carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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