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Morningstar | UnitedHealth's Acquisition of DMG is Supportive of its Wide Economic Moat

UnitedHealth has long pursued a strategy meaningfully different than its peers, which we believe has been critical to the formation of its wide economic moat. In our view, scale is the thread that connects its different businesses and drives the competitive advantages that allow the company to earn excess returns over time. Under one roof, United houses the largest private health insurer, a leading ambulatory care and health analytics franchise, and the soon-to-be second-largest pharmacy benefit manager by volume in the country. Cost advantages and network effects generated by the company's size and scope underpin United’s wide moat and we think support its ability to serve clients at a lower overall cost than rivals. The result is enrollment growth and returns on capital that are nearly unachievable by competing firms.While the CVS/Aetna and Cigna/Express Scripts mergers suggest that competitors are coming around to this viewpoint, we think United's lead will be difficult to catch over the medium term. Management has consistently been able to invest for where the industry is headed, and we expect this to remain the case under CEO David Wichmann's leadership. Whether expanding the firm's PBM capabilities with the acquisition of Catamaran in 2015, building out a top health analytics product in OptumInsight, or improving the transparency of its medical benefits offering through point-of-sale drug rebates, United has demonstrated an uncanny ability to remain at the leading edge of changes affecting the industry. We expect the company to maintain its leadership position through continued product innovation while pursuing acquisition opportunities that add competencies to the enterprise. The national dialogue around healthcare reform is likely to intensify leading into the 2020 election cycle, but we contend that United and its largest peers will find a way to weather the storm. The relatively low likelihood of widespread industry disruption and opportunity for private insurers to continue to be part of the solution suggests to us that United is more likely than not to continue earning excess returns well into the next few decades.