Medicare enrollment surged from 48.9 million beneficiaries to nearly 56 million beneficiaries between 2011 and 2015, and with 10,000 baby boomers turning 65 every day, tailwinds that support Medicare Advantage and Part D aren't likely to fade soon.
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In this clip from The Motley Fool's Industry Focus: Healthcarepodcast, analyst Kristine Harjes is joined by contributor Todd Campbell to explain why companies likeUnitedHealth Group(NYSE: UNH) andHumana(NYSE: HUM) could be the best way to invest in rising Medicare enrollment.
A full transcript follows the video.
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This podcast was recorded on Sept. 14, 2016.
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Kristine Harjes:Around $3 trillion each year is spent onhealthcare in the U.S. And that's only growing. About $0.20 for each of those dollars supposedly comes from Medicare, which added up to about $587 billion in 2013. Meanwhile, that's expected to grow substantially. The Congressional Budget Officeexpects that net Medicare outlays will increase by67%by the year 2024, which would bring it to $866 billion. Todd,as you mention, you havean aging population, you have healthcare becoming more expensive, and that does meanthat Medicare spending is going up.
Todd Campbell:Right. It's tough sometimesfor investors, because we're trying to figure out,what's the purest way to investin a particular areawhere we think that growth is going to be coming. In Medicare,it's difficult,because most of the large insurers arediversified private insurers. They'reproviding employer-sponsoredinsurance,they're participatingin the Obamacare exchanges, they're runningMedicare programs for various states,and then they're also doingthese Medicare offerings,selling these Medicare plans.I think for investors who wantto have that diversification across the entire health insuranceindustry, a company like United Healthcare can make a lot of sense. And then for people who might be interested in more of a pure play onMedicare, consider Humana,because Humana gets 73% of the revenuedirectly from Medicare-related products, so, part C and part D plans.
Harjes:United Health is a reallyinteresting one, here. TheirMedicare supplement numbers, and theirMedicare Advantage, that's handled byOptumRx,and that has been a humongous driver of their revenue growth lately. If it keeps upwith current pace at that growth, thisOptumRx segment of the company could catch up to the non-Optum part. So, UNH isbecoming more and more of a way to play Medicare.
Campbell:Right.It's a services and technology company, too. Aswe get to the point where we're trying to find outthe best ways to provide the right treatment to the right patient at the right time, insurers arestarting to play a larger and larger role in helping to accomplish that. That'sobviously creating new revenue streams, andOptima is a great example of how that is playing out.
Harjes:Exactly. So, that's one route you can take -- looking at the insurers. Another way that an investor can look at this is dive into the figures that arepublished publicly about howand where Medicare spends most of its money. 14 drugs costsMedicare a billion dollars or more in 2013. These are for yourchronic conditions like diabetes, depression,high cholesterol. Some of the names that stood out to mein this list, the first one was Nexium.Nexium was the costliest drug in 2013. It cost the system $2.5 billion to cover to 1.5 millionMedicare patients that were being prescribed the drug. This is anAstraZenecadrug, althoughPfizerintroduced a generic back in 2015. If you look at the numbers forNexium,it's still making quite a bit of money. Thatgeneric came out in February of 2015,the Nexium brand still brought in $2.5 billion forAstraZeneca in 2015. Even though this was down from 2014 numbers, this is still a drug that'svery common among Medicare recipients. In 2015,it was still the second most expensive to the program.
Another one that stood out wasSovaldi, which we talked about a bunchon this show. This isGilead'shepatitis C drug. This was actually,in 2014, the No. 1 biggest expensedrug for Medicare, weighing in at $3.1 billion. That was to treat just 33,000beneficiaries. That's compared to roughly 1.4 million for Nexium. So,interesting dynamics there.
Campbell:You know, what's interesting here, too, Kristine, forinvestors, we also have to remember thatMedicare, yeah, there's a large populationof elderly people,and they're obviously going to be demanding a certain amount of drugs. Butthese companies are not pure plays. And there's risks that could be associated with that. We've all seen inthe news over the course of the last year, all this payer pushback that could lead toregulatory changesthat put the kiboshon future price increases for drugs.
Kristine Harjes owns shares of Gilead Sciences. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short October 2016 $85 calls on Gilead Sciences. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.