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Baillie Gifford
Updated 19 May 2023
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Can the US health insurance maze be made easier to navigate? Malcolm MacColl, deputy manager of The Monks Investment Trust, tells Morag Cuddeford-Jones how Elevance Health plans to do just that

Thinking about US healthcare brings Malcolm MacColl out in a cold sweat. Sick Americans, he says, must also suffer inconsistency, complexity and expense.

“US healthcare is dreadfully uncoordinated,” he says. “The primary care provider and the health insurer are not always joined up and management of health records is appalling.”

As for the cost for the average family, premiums for the commonest kind of private healthcare insurance rose by 47 per cent between 2011 and 2021, more than twice the inflation rate.

So it may come as a surprise that Elevance Health is Monks’ biggest holding. The firm describes itself as the US’s biggest medical insurer, serving more than 47 million Americans.

As MacColl explains, Elevance’s scale helps address some systemic shortcomings helping patients find their way through the healthcare maze and reducing operational costs.

“The client wants as broad a coverage network as possible,” he says. “They don’t want to be told: ‘Sorry, you can’t see that clinician.’ Scale enables Elevance to better look after its customers. And because there’s a huge administrative aspect to the business, the more volume, the more it can spread fixed costs.”

In a country where around 90 per cent of the population has some form of private health insurance (the UK figure is 13 per cent), the company offers two types of plan:

  • Fully insured – Elevance assumes the financial risk of a member’s medical claims.
  • Administrative services only – Elevance typically provides the same services as above – claims processing, medical management and other customer services – but the member’s employer or other liable party pays for the claims incurred.

MacColl contends that both halves of the business are set to grow under the leadership of its formidable chief executive, Gail Boudreaux, a university basketball star who headed the commercial division of UnitedHealthcare before taking the reins at rival Elevance. And because the wider market is sceptical about insurance, other investors underappreciate the opportunity.

“It’s a dream for a growth investor because the market hasn’t yet recognised its true value,” he says.

Demographics will be the critical driver of the fully insured side of the business, says MacColl. Elevance aims to build its market share of retiring baby boomers to close to 30 per cent.

One way it plans to do so is by marketing its Medicare Advantage plans to those about to leave work. The government-subsidised scheme covers hospital and doctors’ costs and, in most cases, certain drugs and other services such as dental treatment.

Medicare Advantage tends to cost less than alternative Medicare schemes that don’t involve private companies. But the trade-off is that Advantage scheme members can only use medics and other providers in the firm’s network, except in emergencies.

So Elevance’s size gives it a natural advantage over rivals whose networks of caregivers are smaller. And this is reflected in its high customer satisfaction ratings.

“Some investors are nervous about the underwriting aspect of this,” MacColl adds, referring to the firm’s ability to maintain a healthy margin between what it charges and pays out. “But Elevance reprices very regularly. So even if it were to make a mistake, it’s very easy to correct. And it’s got a fabulous underwriting record.”

Turning to the administrative services only side of the business, MacColl acknowledges that Elevance has historically made less per member than it might have done. But he expects that to change.

“Elevance has arguably got the strongest management it has ever had. And they are driving efficiencies harder and scaling through cross-selling,” he says.

Cross-selling involves convincing employers to sign up to additional services. These can include dental, vision and mental health care, as well as digital tools to let medics remotely monitor patients’ progress.

“The story of the next 15 years will be the further development of Elevance’s services business,” MacColl says. “And the opportunity is vast because the scale of the US health system is gigantic.”

That’s not to say there aren’t risks.

“You’ve got the potential for regulatory interference and for caps to be put on profitability,” MacColl acknowledges. “But what I think people get wrong is that it’s nigh on impossible to run the US healthcare system without these types of business.”

Healthcare insurance is complex, but Elevance offers the prospect of steady compounding, with profits being reinvested in the business over decades to create outsized growth, making it an ideal pick for investors focused on the long term.

So even if the US healthcare system is complex and opaque, as long as Elevance continues to ease patients’ path through the labyrinth, the prognosis for customers and investors looks positive.

Malcolm MacColl
Deputy Manager, Monks

Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.

Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.

Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority and are based at: Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.

A Key Information Document is available by visiting bailliegifford.com

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